The Economics of Cloud Computing

Cloud computing brings together several existing technologies including service oriented architecture, distributed grid computing, virtualization, and broadband networking to provide software, infrastructure, and platforms as services. Under the old IT model, companies built their own server farms designed to meet peak demand using bundled hardware and software solutions. This was time consuming, capital intensive and relatively inflexible. Under the cloud computing model, firms can rent as many virtual machines as they need at any given time, and then either design or use off-the-shelf solutions to integrate company-wide data in order to easily distribute access to users both within and outside of the company firewall. This converts fixed capital costs into variable costs, prevents under and over provisioning, and allows minute by minute flexibly. Consumers are also increasingly turning to the cloud for computing service through such applications as Gmail, Pandora, and Facebook. The purpose of this paper is to discuss this new and transformative technology, survey the existing economics literature on the subject, and suggest potential directions for new research.