Why is “Commodity” an offensive word in IT?

Why is “Commodity” an offensive word in IT?

I’m a physicist, turned weather derivatives analyst, turned commodities deal originator who now finds himself in the world of IT.

I find that in IT, the word “commodity” is a derogatory term.  Certainly those people who build products or deliver services that are being described as becoming commoditized, feel affronted by such an implication, because they feel it implies a lack of qualitative variation and hence a lack of value-add.

I suspect that this is just semantics.  IT is not a single market, but rather a continuum of overlapping markets.  Commoditisation is simply the process of being able to put a value on each component of the final delivered service.

Let’s look at the value chain that leads to the delivery of cloud computing…and let’s start right at the beginning.

Cloud Need Places to Live – Data Centers.

Well at the end of the day, a data center is an air-conditioned shed with power sockets.  So long as the IT hardware stays cool and has power, that’s all that matters right?  Well to an extent, yes, but not if you want 100% uptime.  Tier IV datacenters distinguish themselves from “commodity datacenters” by having better security, better power and networking redundancy, better air filters and being located somewhere that is not prone to earthquakes, tornadoes, tsunamis, hurricanes, floods and lightning storms.  Go and take a tour of the Switch SuperNAP in Las Vegas and you’ll soon get the idea of what a commodity data center is not.  However, the existence of independent top quality datacenters like the SuperNAP, which plays hosts to several competing cloud providers, means that the quality of the datacenter should just impact on the cost base and hence the price of the cloud.

Clouds need Electricity to make them Live

Electricity is electricity is electricity, it is all the same.   Nonsense.  Please let me enumerate the many ways in which electricity is not all the same, starting with the obvious and ending with the electrical engineering differences.

1)                 Location, location, location.  Delivery location is crucial, because there are significant losses when you move electricity around.  Power delivered in New York City is considerably more expensive than in New Jersey, and power delivered at the power station is worth a lot less than power delivered at the datacenter.

2)                 How was it generated?  Almost every form of power generation, whether fossil-fueled, nuclear or renewable has a downside associated with it.  Many of these downsides are managed by blending power generated from different sources together, into “commodity” power which gets delivered to the home or datacenter.

3)                 What’s the frequency, Kenneth?  A nuance of electricity is that supply must be made to equal demand on a second by second basis, otherwise the frequency will change and if it deviates outside strict limits, circuit breakers will trip to avoid home appliances exploding.  To manage this, power station operators, as a requirement of their licences, have to offer prices to the grid operator at which they will turn on their power station, and another price to turn off their powerstation.  This is called the balancing market, and all bids are not equal.  The grid must be balanced at all locations on the grid, so every generation plant is special and unique and in no way a commodity, especially when you start worrying about the reactive power component too…

Clouds need Connectivity to be Useful

Connectivity is absolutely a commodity…to me.  I can’t tell the difference between 8Mbps, 25Mbps and 100Mbps.  Everything I do in the cloud works perfectly well at all of those speeds.  Ah…but it is very annoying when I can’t access the cloud, for example when my wifi goes down.  Or when they’re digging up the road again and chop through the fibre-optic cable.  I actually have considered getting separate connectivity with a different, redundant provider to my house, to deal with these annoying outages.  So for me, I would gladly trade speed for more uptime….for what I do.  Every use case is different.

Infrastructure…again another commodity?

When you hear about the government making investments in infrastructure, they generally don’t mean computers – they mean roads.  Take San Francisco, for example – there are two routes from downtown to the Bay Area – I-101 and I-280.  Clearly a commodity service – there is choice, as both achieve the same end of getting you from A to B.  And this would be true, if I were paying someone else to take the trip, reimbursing them for a successful trip with no time constraints.  However, 280 is a much more pleasant journey – less traffic, better views, less pot-holes, less roadworks.  Personally, I would actually be prepared to pay a modest premium to drive down I-280 instead of I-101.

The same is true for cloud infrastructure.  There are users who just don’t care about pot-holes, traffic, maintenance, no matter how bad, so long as the price is right.  There are also users who definitely do care about one or more of those considerations, along with a host of others.

Software…generally not a commodity

The reason why most software is not a commodity is because of the user interface and hence the user experience.  To me a commodity is something that when used, achieves a certain end, and the value surrounding how that end is achieved is small compared to the value of simply achieving that end by any means.  If software is hard to use, it wastes people’s time, and the cost of that far outweigh a cheaper software licence.  Therefore, unless the user experience is almost identical between software providers, then software cannot be a commodity.

Now of course, if it is software that uses software, perhaps via an API, then the user is a step removed from that piece of software, therefore it can be commoditized.

In Summary 

So to me, the IT market is a continuum of overlapping markets, where as each layer becomes more competitive, it is easier to put a value on the contribution that layer makes to the final delivered service.  The value of some layers will vary rapidly over time, and others will be fairly static.  There will be buyers in each layer, who look at the layer underneath, and only want to buy “the good stuff”, when others just won’t care.  The key is that you should pay a premium for “the good stuff” and get a discount for “what no one else wants”.  Oil is a “commodity”, but airlines pay a premium on the price for Brent Crude to get jet fuel, and road layers expect a discount to get their tar.

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