Economic Issues of Cloud Computing

There are several important ‘economic’ aspects of cloud computing that will affect the competition in the SaaS/PaaS (platform) market. Arguably, the two economic aspects that will have the most profound implications for the development of cloud computing are:
- Changes in the strength of network effects

- The organisational model that emerges, ie, whether cloud computing will retain its current ‘conduit’ and vertically integrated structure or whether it will develop into a two-sided market

- Compatibility: An additional key issue involves compatibility, in particular whether it is feasible for entrants to achieve one-way compatibility with an established standard. This strategy is especially relevant in the cloud ecosystem because compatibility is easier to achieve and less costly. Hence, entry is likely to be easier in the cloud ecosystem than in the on-premises market. ‘Glide’ for example, is an online platform that offers email services, office suite software, and other software services. Glide’s applications software products are compatible with the dominant platforms: its software runs on all three of the major desktop computing platforms: Windows, Linux, and Apple (Macintosh). Additionally, Glide software is also compatible with virtually all ‘smartphone’ platforms in order to attract users who access the Internet from cellular phones. In the case of Glide, compatibility across desktop and mobile platforms means that documents edited online will be updated on the desktop (or mobile) and vice versa. By ensuring compatibility with the dominant platforms, Glide increases its chances of being able to compete despite a much smaller installed base. (See Rosenblatt 2009.)

- Cyber security: There is a nascent literature at the ‘intersection’ of computer science/engineering and economics on cyber security. Much of the work in the field has been undertaken by computer scientists and has led to some important insights into why information systems have become so insecure (Anderson and Moore 2006). Contributions by economists have primarily focused on (i) the lack of incentives for individuals or network operators to take adequate security precautions – see Varian (2004) and Camp and Wolfram (2004) among others – and (ii) the incentives for firms to disclose information about vulnerabilities (Choi et al 2010.)

There is now a consensus in the literature that improving Internet security involves more than just finding technical solutions. Indeed, the Slammer, Blaster, and Sobig.F viruses exploited vulnerabilities even though security updates had been released. That is, although the updates were widely available, relatively few users had applied them. This clearly illustrates that technical solutions alone cannot solve cyber security problems.