Dr. Strangelove or: How I Learned to Stopped Worrying and Love the Cloud

What is Cloud Computing?

the practice of using a network of remote servers hosted on the Internet to store, manage, and process data, rather than a local server or a personal computer.

Translation:
"Somebody else's servers"

But wait, is that really such a bad thing?

Let's consider data, highly valuable to be like money. We don't store money under our mattresses anymore. We outsource our money needs to third party service providers called banks. In return, we get security, availability and a host of other services.

Cloud computing is exactly the same. While it may feel safer stuffing your data under your mattress, the truth is in most cases it makes sense to use a 'bank'.

So what Cloud Computing models are there?

We're a fintech company after all so let's try and extend the bank and banking metaphor to introduce three broad categories of cloud computing.

'Self Hosted' Cloud Services

Companies like Facebook and Google run their services exclusively on their own hardware. They own numerous datacentres and service users globally.

This is the equivalent of a company running its own shops and having its own closed banking network. They employ their own cashiers, vault specialists and cash collection agents among others.

Obviously the cost of running such an operation is immense and only the largest companies can really pull this off. For companies that are large enough, they may benefit from running these in-house.

Smaller companies that try to go down this model inevitably suffer from issues such as availability, redundancy and data loss. On top of running a competitive service, the company has to worry about running a bank too.

Managed Cloud Services

Providers like Rackspace and Oracle have built their bread and butter on this model. Companies realise that running a bank on top of their own organisation is complicated and requires domain expertise that lies outside of their sphere of competitive advantage. But they still want the bank to exist only in their shops. So they hire a company that builds a dedicated banking network for individual clients.

In this instance, companies have their own servers but the servers are managed by third-party employees, often in datacentre's owned by the service provider. They get to enjoy some benefits of cloud computing depending on the service provider and the cost of the cloud is explicit to them.

Cloud Computing Service Providers

Finally, we have applications such as Dropbox, Netflix and Airbnb that all use third-party cloud service providers such as Amazon Web Services (AWS) and Microsoft (Azure).

Essentially these companies realise that their comparative advantage does not lie in trying to run a bank. Instead, they go to third party providers such as Citibank, HSBC or JP Morgan to take care of their banking needs.

This gives them security, availability and a whole host of other services that they wouldn't have available to them were they to run it themselves. It also means that they can scale virtually infinitely on the fly. Were they to run their own bank vault system it would eventually hit bottlenecks such as storage or how much money they can physically transport at once. They would have to build new vaults or hire more staff to transport money before they could accept more business. By using third party service providers, they don't have to worry about this. Their customer's money (data) is safer with a professional firm than a dingy startup mattress.

While the benefits are more obvious to startups and SMEs who cannot afford the high costs of running their own infrastructure it is also becoming increasingly common for established technology companies (such as Dropbox, Netflix and Airbnb) to continue using third party providers. Much like the commercial banking industry this is likely to become the norm. Adam Smith and David Ricardo theorised this long ago - specialisation and a focus on comparative advantage leads to higher productivity.

The future

The cloud computing revolution started in the consumer space. It's now well established how much more individuals can accomplish thanks to highly available, distributed computing power through the internet.

This focus is now coming to the enterprise and companies that ignore the benefits of cloud computing out of unfounded fear of the unknown will find themselves falling behind as competitors accomplish far more with dramatically lower costs.