The Virtual Machine Economy

There is an interesting billboard war going on here on Route 101 in Silicon Valley: reigning tech titans and new tigers are fighting a proxy war for the next phase of Information Technology (IT).  Unlike prior technology competitions, it’s not Coke vs. Pepsi thing.  It’s a physical vs. virtual war: the lords of traditional IT are besieged and enticed by the new cloud computing entrants. And it’s a big game – roughly $3.8 Trillion of worldwide IT spend hangs in the balance. The background music for this script probably resembles the soundtrack from The Matrix.

We have seen 3 waves of society based on economic systems and technologies: agrarian, industrial, and post-industrial.  In every era, a new factor of production emerges as its driving economic force.  During the agrarian and most of the industrial era, land, labor and capital dominated.  The crops were planted and reaped; factories turned out finished goods.  As the industrial revolution got into full swing, energy became a critical factor of production, and the rise of grid-delivered electricity and fossil fuel engines eliminated dependency of natural energy sources over time.

In the post-industrial economy, human capital (a nation’s ability to create knowledge workers) and intellectual capital (copyrights, patents, etc.) took on the attributes of hard assets, equal to land and financial capital.

IT is the newest factor of production for the post-industrial economy.  IT is a sub-component of every industry: at an estimated 6% of the U.S. economy, it is larger than component of GDP than gasoline.  IT is inside every steak, potato and glass of red wine.  It’s in your car, chaise lounge and iPad delivered video programming.

IT, however, is changing rapidly and profoundly: the equipment and software you used to install in your office and home is being replaced by set of capabilities delivered, virtually, by cloud.  The old IT equipment purchase model is starting to give way to rental models. New third parties like Rackspace and Amazon Web Services are augmenting, and in some cases, replacing, the role company IT staffs played.

Built on hardware (network, servers, storage) and software (applications, operating systems, etc.) and sold as individual components, in technology silos, the old IT model has reigned supreme for half a century.  But the new model has a new atomic unit of consumption: the virtual machine.  The virtual machine is a computing instance (think of it as a virtual and complete computing instance that lives in the cloud) that you can rent by the hour, month or year.  It’s virtual because this computing power can be supplied independently (decoupled) from the underlying gear as a service. Increasingly, all applications are written to run on virtual machines.  The virtual machine is the hectare, dollar, kilowatt-hour, and horsepower of the new economy.

What’s interesting is that you can price virtual machines from a rapidly growing range of providers.  Thus it competes with the internal price of your own IT department.  In effect, it’s a commodity and there is a growing external marketplace.

When an economic capability can be measured and provided in an open marketplace it becomes a factor of production.  It becomes a basic building block of the economy.  The competitive element – and this is where this becomes really interesting – pivots on capabilities, costs and speed of providing virtual machines. If I need virtual machines to create the next movie rental service or tablet computer, the speed of being able to enable them, is part of my competitive leverage.  In the virtual machine economy, the fast eat the slow.

So when businesses evaluate how well they are doing, the processes and capabilities behind providing virtual machines to power their goods, services and employees should become part of their management science.  Of course, “return on” the other factors of production do not go away, but they are catalyzed, irrevocably by virtual IT.  The efficiency of utilizing virtual machines impact a major part of businesses’ income statements

Traditionally the countries and companies that provide lower cost or faster alternatives of economic factors of production gained the business mode of the age: manufacturing shifted to Asia in the past 30 years and IT outsourcing moved to India; movie rental moved from Blockbuster to streaming services including Netflix.

As the modern economy pivots to the virtual machine economy, which companies will win or lose?  And what will it mean for your company and country?

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One thought on “The Virtual Machine Economy

  1. Sean Ginevan says:

    Isn’t this all a realization of Nicholas Carr’s vision for IT as a utility, in the same way that energy and water are utilities, that he articulated in Does IT Matter? And if so, does anyone really gain competitive advantage from their IT solutions in the next 20 years?

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