How Cloud Computing Makes Billions By Billing Millionths of Pennies

Data scales exponentially, which is why more companies want to get into it - and why they are so reluctant to let consumers exert any influence how their information is captured, organized, managed and sold. JL

Quentin Hardy reports in the New York Times:

At Amazon Web Services there is no charge for the first million times a customer runs code. Thereafter, A.W.S. charges by the million times, or for the hundreds of milliseconds the computer is used. This economics of tiny things demonstrates you have to be really big to worry about making money off things that are really tiny. Google charges pennies for search ads and spends $9.9 billion annually building out a global computing business.

Imagine building an enormous beach resort, maybe the best in the world. Instead of renting the rooms, you charge guests based on the grains of sand they touch. You charge very little per grain, but if they lie on enough of them, it adds up.

That is one way to think about what is going on at the world’s biggest cloud-computing companies. Instead of grains of sand, think about computing cycles, the activity that goes on in a computer server that is running software. For a price, think about one line of software code for two one-millionths of a penny.

When tolls that tiny are paid often enough, they can make a billion-dollar business. At Amazon Web Services, which pioneered this method late last year, there is no charge for the first million times a customer runs code. Thereafter, A.W.S. charges by the million times, or for the hundreds of milliseconds the computer is used.

“The scale at which we operate allows us to do innovative things,” said Matt Wood, general manager of product strategy at A.W.S. “When we get better economies of scale, we’ll use that to our advantage.”

This economics of tiny things demonstrates the global power of the few companies, including Microsoft and Google, that can make fortunes counting this small and often. In other words, you have to be really big to worry about making money off things that are really tiny.

Google charges pennies for search ads and spends $9.9 billion annually building out a global computing business. Given enough software, in the realm of millionths of pennies, it could do even better. Good luck to any new entrant without the scale of these tech giants, however, as customers come to expect that sort of cheap metering.

Cloud-computing companies are not the only ones focused on the small. Banks, of course, have for years been content taking a sliver of big transactions, so long as there are many of them. Uber, which enables private cars to temporarily become taxis, can monitor drivers and riders to adjust prices and routes, changing the value of things throughout the day. An auto insurance company called Metromile charges customers based on how many miles they drive a year.

As tech companies get better at measuring things, other businesses can pick up on the techniques, and the fine counting at the big clouds augurs for more precise measurements and pricing everywhere. Mitch Hedberg’s joke about rice being a good meal when you are hungry for 2,000 of something may turn out to be a prophecy.

A.W.S. was an early leader in public cloud computing, or renting access to computing equipment or software over an Internet connection. It started in 2006 as a barely noted fluke by Amazon. It now has over two million computer servers and a million customers, including Netflix, Shell and Brooks Brothers.

Last week, Jeff Bezos, Amazon’s chief executive, gave A.W.S. a long acknowledgment in his annual shareholder letter, declaring that eventually most of the world will run on clouds like his.

The per-millionth pricing began last November, in the A.W.S. product Lambda. Lambda runs a customer’s line of code in response to a request, like looking up a ZIP code when given an address. Customers never rent servers, but pay for the moments of computing.

Microsoft last month announced that it would have its own “serverless” product. Google has something similar in early release, which is likely to be a product by the third quarter

of this year.

Microsoft is even trying to do A.W.S. one better by microslicing the cost to rent some of its software licenses into the minutes of actual use. “We’re renting the sand and charging for the sun’s UV rays that hit you,” said Scott Guthrie, who runs Microsoft’s cloud.

For the big clouds, microslicing is also a way of coping with a tough task: Customers have to feel like they can rent all the computing they want, and the providers must always run at near full capacity. If someone is using cycles, and not whole machines, more people can be packed in.

“The secret to cloud economics is utilization — every minute unsold is money you don’t get back,” said Greg DeMichillie, the head of product for Google’s cloud. “There are very few of us who can work at this scale.”

Like any important new tech trend, the microsliced, serverless model is already attracting investors and start-ups eager to work in the new world — and in this case, wary of what the giants will do next.

An Oakland, Calif., company called Serverless makes software that other engineers can use to develop products for computing in Lambda and its ilk. “We think this could be the focal point of A.W.S., even though I have no idea how they make money charging this little,” said Austen Collins, the founder of Serverless.

One way they make money is by adding on other products and servers. So does Mr. Collins think A.W.S. could thwart his business? “It’s a mistake to think Amazon won’t be in everything,” he said. “We don’t say, ‘What if Amazon does it?’ We assume they will, and try to do something a little better and faster.”