And yet again, the term “Arbitrage” pops up in the business lexicon outside of investing; but I don’t think everyone is seeing this for the insidious term it is. At least, to me it is. Why? Because of Enron, and the mindset that exists in certain sectors of business. Exploit arbitrage opportunities. Exploit them. Don’t build anything other than a profit, which is great, when you are providing a service or a product. Something of value. But when a company exists to exploit the opportunity to make a profit, you get increased costs and marginal utility.
What put this soap box under my feet? A comment by ClipperHouse’s Matt Sherman. He said that Amazon has launched spot pricing for cloud computing and that Amazon’s core competency is pricing. I think “technology” is a core competency for Amazon, price is more of an advantage; they can exist on that small margin easier than a smaller company/competitor.
But, this article is about the spot pricing issue. Here is what I believe; A company MUST have extremely ethical people leading the charge in any operation. Exploitation is a bad thing, even when it builds profit. Taking advantage of an opportunity built to lower prices is easily turned to exploitation of an arbitrage opportunity and you see slowly rising prices and ultimately; Enron.
Slippery slope? Not really. Just look at history regarding the tactics. From hedge funds that don’t create any value but raise prices as people speculate and then demand ever higher levels to reach that spot, to the Enron’s of the world who create the arbitrage situation which is exactly what could happen if the Spot pricing for cloud computing is left without thresholds. Prices will not fall, they will increase.
It is all about the ethics of business.
Taxpayers [and not the Federal Government as a lot of people like to see things] bailed out banks with the expectation that the money would be loaned back and thus, we refuel the consumption process. That didn’t happen. Things were unwound, the money is being returned because of the instillation of ethics and monitoring and thresholds; but while the money was out, record profits and bonuses were given due to the exploitation of arbitrage pricing based on spot pricing, increased interest rates put on all consumers even those with perfect credit records, and increased penalties. Why? Because you might expect, as someone trends the pricing (see Forex), they see a position that profit can be extracted from as long as the risk isn’t too high (people need money), so the risk level is based on demand. Thus, the price slowly creeps up until you hit the price elasticity of demand threshold (Risk Threshold) and either the trend declines, or again as you might expect… consumers are conditioned to expect a higher price when there is a single provider. Which is what happened with Enron and California rolling blackouts. Pay more, or be punished, you too grandma.
What does all that have to do with Cloud Computing, and Spot Prices for such? Well, you are turning a fixed asset that is fundamentally a sunk cost into an arbitrage position and something to be exploited by the creation of arbitrage opportunities. Stack more people onto a cloud server and CPU cycles are maximized, but the consumption of the hardware declines and prices go up as the product sells fewer and manufacturers lose the incentive to create low priced hardware because they now know that hardware is being maximized based on CPU cycles per dollar.
What I see happening, is a slow increase to cost of cloud computing and in web hosting in general as everything moves towards the cloud. The worst case would be a decline in current pricing bolstering the idea that it is a great thing to have spot prices when what is happening is someone is finding is the lower band of the elasticity and then the bounce will occur.
Kind of what I expected with the stock market hitting its low which I calculated by discounting the DOW by the growth rate year over year. I hit the low before the low was reached, we’re now higher than the DOW should be based on a more rational growth rate of 3% and I expect the stock market to drop again. We’ll see if that happens, and we’ll see if the Spot pricing from Amazon is exploited, either by providers of cloud services, Amazon itself, or a third party who creates profit for Amazon but becomes the de facto broker of cloud services.
And all of this is watered down to something as simple as the concept of Ethics in business.