Lessons for Utility Computing

Sometimes the best way to understand how to build a business is to see how the other guy did it.

Sometimes the best way to understand how to build a business is to see how the other guy did it. The creators of the television industry studied radio. Many high-tech businesses were founded by handfuls of engineers who broke off from the company where they learned the ropes. The ailing utility computing business should learn from these examples.

Most utility computing pioneers are in dire straits. For instance, StorageNetworks, one of the highfliers of the Internet era, enjoyed a peak market value of $14 billion but today is being liquidated. Only utility computing providers such as IBM and Hewlett-Packard are hanging on—and then only because of generous infusions of capital. The good news for utility computing is that a model exists: the power utility business. Consider these lessons:

Delivering the power is not enough; ease of use matters, too. The main selling point of electrical power is so understood that its rarely articulated: Electrical power has many uses and is user-friendly. Computing power is similarly dynamic, but its not as easy to access. Customization and implementation are so expensive—and such a drag on upgrades and maintenance—that the ease-of-use appeal so central to selling any utility becomes moot.

Users want the power, not the power plant. The pricing model for utility computing is based on selling the power and the system itself. If computing power is to be sold and consumed like electrical power, providers must remember that users want only the number-crunching power, not the resource-hungry hardware that generates it. Pricing must shift toward a traditional utility price plan, where billing is a function of how much power is used.

Electrical utilities were built on monopolistic advantages. The heavy financial lifting behind a utility startup has most often relied on the built-in protections of monopolies. While power utilities begin with little to worry about except serving the market, utility computing companies must consider competition and develop business plans that account for other providers.

The law of supply and demand never takes a vacation. In the 90s, the U.S. electricity market was glutted, so no major power plants were built. If theres no demand for utility computing—or if its uncertain the market will be more than small—its a gamble to invest in utility computing infrastructures. The salvation of the business will rest on giving customers flexible configurations and realistic pricing, including lowering the cost of implementation, providing true pay-as-you-go pricing and breaking the vertically integrated model to focus on value-adding activities. Success can be found by studying power utilities history, but most utility computing enterprises are still learning the hard way.

George Chen and Lloyd Switzer are consultants at the strategic consulting firm Strategos, based in Chicago. Free Spectrum is a forum for the IT community and welcomes submissions at free_spectrum@ziffdavis.com.