technical blog

The Economics of Supply, Demand, and the Monetization of the “Edge”

-5 minute read

In 1776, a Scottish author called Adam Smith published “The Wealth of Nations”, but unfortunately for the British, Smith’s book was released in the same year as the American Revolutionary War began in earnest. If it had been published ten years earlier, Parliament and King George III may have taken to heart Smith’s sentiment that “colonies should be granted representation in the British parliament proportional to their contributions to public revenues”. Had this advice been heeded, there may have been no 1776 and arguably, the America Colonies would now be ruling England. Adam Smith would not simply be a great economist and philosopher, but the founding father of the United States of North America and Great Britain.

Supply, Demand, and the Edge

As part of his thesis written some two hundred and fifty years ago, Smith hypothesized – “Price is regulated by the proportion between the quantity brought to market and the demand of those who are willing to pay.”  This simple statement is as profound today as when it was published and has provided the stimulus for numerous economic movements. Margaret Thatcher and Ronald Reagan, who arguably created perhaps the two strongest economies of the 20th century, were reputed to always carry a copy of Smiths work with them.

But what, if anything, does this have to do with edge cloud and cloud computing?

For cloud computing, Smith’s principle is enduring.  If we portrayed a graph with price on the y axis and quantity on the x axis and were to plot where the downward slope of demand (Cloud Market) intersects with the upward slope of supply (Compute Inventory), this point in a free market where all available cloud compute resources could be monetized.

The challenge for public cloud providers is that Smith’s principle assumes that the supply at a given price is limited and the cost of an additional unit of inventory becomes higher as the total supply expands. In most industries this is true. A good example is the auto sector. To deliver more quantity, additional workers are required and that comes at a premium as auto makers have presumably exhausted all the workers willing to function at a lower cost.

In public cloud environments, these economics of industrial production do not apply, or at least not cleanly. The cost to add capacity is somewhat negligible as compute costs become insignificant, and storage and bandwidth costs plummet.  Spinning up shared virtualized resources costs is proving to be quite cost effective compared to traditional IT. It is anticipated that 83% of enterprise workloads will run in public clouds by 2020 and thus it could be argued that public compute inventory is effectively infinite if the price exceeds the cost per unit.

This is a challenge for the public cloud companies is an increase in demand for compute has not increased the price. In fact, over the past 10 years price has generally dropped or, at a minimum, has remained constant at any level of demand. The illustration above outlines the decrease in cost per hour pricing for Linux on-demand cloud services offered by a large public cloud provider[1], while the cost of some services dropped as much as 14% in the year up to August 2018[2]. However, the increased demand observed over this period did not create a supply imbalance, and has thus resulted in a highly commoditized market place.

The Commoditization Conundrum

This commoditization has generally been seen as a challenge by many network operators considering edge compute as a way to monetizing their investment in their fixed and 5G access networks. Its left them struggling with a business model that, at first glance, doesn’t appear to make a lot of sense. In many cases the approach has simply been for an operator to turn over their edge to a third party while they continue to pay for power, cooling and real-estate based on the hope that they may profit from transit or metro network savings.

However, the economics of public cloud and edge cloud and compute models are very different and there is a good reason for this. The edge offers a fixed, finite inventory of compute resources. This is unique for edge compute and is the result of creating ultra-small and ultra-close access nodes that are distributed in nature with considerable geographical diversity and relatively small available power and real-estate footprints. This means that the supply of edge compute resources at a given access point remains of capacity exists. This has resulted in pricing that is steadily climbing, even as the number of edge compute applications remains relatively low compared to broad spectrum of enterprise applications – a further indication of the effect that a constrained inventory supply has on value.

Clearly every application does not require edge compute. Public cloud & traditional COLO are still a viable locations to host enterprise applications, while there will always be requirements for specific real-time functionality to reside on the “device” itself – autonomous vehicles are a great example. However, for low latency, interactively-intense applications the edge is a hard requirement and as such will command premium pricing. This scarcity of edge compute inventory limits surplus stock and establishes a constrained supply that can be unquestionably monetized, thus the average cost of edge compute will increase significantly and enable the Network Operators to extract fair value from their investment.

So as Adam Smith declared some 250 years ago, when things are scarce and in demand, people have proven to be prepared to pay more for them and there is more profit in supplying them so network operators can feel justified in investing more capital to produce them. Where there is a glut, things are commoditized and prices and profits are low, producers switch their capital and enterprise elsewhere. Unlike the public cloud, the edge inherently rations inventory and drives pricing up automatically and without the need for central direction.

The new “Machine Economy” is already stimulating the deployment and orchestration of edge dependent applications.  While media and entertainment workloads, high resolution cloud gaming and bandwidth efficient VR video delivery may seem like obvious edge use cases for an operator, there are a gamut of emerging enterprise applications that have the potential to be the “new oil”. Autonomous driving experiences, haptics and tele-operation, vRAN, SD-WAN, IoT and smart-cities all benefit from, and more importantly, help the operator to monetize edge and access infrastructure investment.

What Can Be Done?

So what is the call to action?  We believe there is scarcity and high value associated with the Operator edge network and that, if combined into a global network, will deliver exponential value and revenue. Operators also cannot wait for 100 applications to become popular before deciding whether or not to experiment. Edge is a $5Bn+ business and provides numerous opportunities to start trialing new business and deployment models, thus the time to learn is “now”. It all starts by installing some resources in 1 location. Its low cost, high impact and will help start seeding the edge.

[1] Verified by the Internet Archive
[2] Right Scale: Comparing Cloud VM Types and Prices

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