Cloudonomics: The Business Value of Cloud Computing, + Website

IT Spend

Assertion 12: The cost reduction that the cloud offers will in turn drive lower IT spend.

 

This certainly sounds plausible at first glance. The cloud offers many advantages: reduced cost, enhanced agility, improved customer experience, and the like. To the extent that the cloud enables reduced cost for a unit of compute or a unit of storage, then IT spend might be expected to drop.

But it probably won’t for the foreseeable future, due to price elasticity of demand. For some products—so-called Giffen goods and Veblen goods—raising the price tends to increase demand. For Giffen goods, such as some food staples, this is due to an effective lower net income due to generally higher prices driving a need to substitute the Giffen good for still higher-priced products. For Veblen goods, such as Lamborghinis, it is due to the status value of the good.

Normally, though, a reduction in price tends to increase demand. In an observation credited to Stanley Jevons, a nineteenth-century economist, the increase in demand can be greater than the reduction in price, leading to growth in total industry revenues.6 Although this is referred to as Jevons’ Paradox, it doesn’t seem very paradoxical, given a little thought.

Such increased demand would certainly appear to be true of a general-purpose technology such as computing. Two drivers are important here. The first is that a reduction in total cost of computing or storage means that more computing can be performed for particular applications ...