Imagine being able to build a data center with a guarantee that a portion of your future capacity will be bought at a certain price for an extended period of time before you even built the data center? A new group of companies are working on making this kind of vision a reality.
Earlier this week 6fusion, a company focused on standardizing an economic measurement of IT infrastructure and provider of a global marketplace for buyers and sellers of cloud capacity, signed a non-binding Letter of Intent (LOI) with CME Group (Chicago Mercantile Exchange), the world’s leading and most diverse derivatives marketplace. The agreement provides the framework for the companies to explore the development of an Infrastructure-as-a-Service (IaaS) Exchange specifically for the trading of compute derivatives. Under the terms of the LOI, 6fusion and CME Group will work together to explore the development of an open marketplace for trading financial contracts.
In looking at corollaries in treating compute resources as a commodity, the closest is probably that of energy creation and power plant financing. In the energy world, commodities trading desk are used to protect power companies from dramatic price shifts, using a so called “Hedge”. These hedges are done in a number of very interesting ways. First of all, most of the major banks act as both a provider of capital for buyers and sellers of power plant assets and the companies themselves. The majority of the major finance players in the energy world also have commodities desks, allowing them to operate in the commodities market as well as in the more traditional loan / financing businesses. They can offer issuers (power providers) access to commodity markets where hedges can be created to protect an energy company from dramatic changes in prices of coal, natural gas or oil.
Many utilities that provide electricity, for example, use coal to fire their plants are protected from price swings and more importantly the banks who are trading these commodities have greater influence and protection from these price spikes by sitting on both sides of the deal. In essence dovetailing leverage finance with commodities. In return, these banks are granted the ability to not only finance the development of the power plants, they also buy the future contracts on the energy itself which in turn gives the energy providers a guarantee of future revenue which then can be used as collateral for the development of their various energy assets and reduces the risk for all involved.
This in a nutshell is the driver for the commoditization of computing resources. It has less to do with the actual computing resources so much as the ability to provide enhanced insight into future cash flows while reducing the risk surrounding the un-certainty of future utilization levels. Data-centers are the new power plants.
Back in 2010, I also tried my hand at creating such a platform with SpotCloud (Acquired by Virtustream in 2012). The platform provided a generalized structured framework for the creation of a Compute Spot Market where compute centric commodities were traded for immediate delivery, opposed to a futures market where commodities are made available at a later date. A Spot Market is an essential requirement before you can potentially have the ability to buy future capacity in bulk. Ultimately, the SpotCloud platform was a bit too early.
In this latest attempt, “6fusion has overcome the technical barriers to establishing compute as a tradeable commodity,” said John Cowan, 6fusion CEO and Co-founder. “Working with the world’s leading and most diverse derivatives exchange, we are setting a course to develop a robust spot and over-the-counter (OTC) derivatives market for cloud computing based on 6fusion’s innovation.”
“As a leader in derivative markets, CME Group is pleased to work with 6fusion to explore the idea of a new electronic marketplace for trading spot and derivative financial products based on the WAC,” said Bryan Durkin, CME Group Chief Operating Officer.
The CME and 6fusion aren’t alone in this new rush toward compute trading. Back in July, Berlin-based Zimory, announced that it had secured $20 million in funding led by investor & partner Deutsche Börse. Deutsche Börse Group operates the Frankfurt Stock Exchange (Xetra), one of Europe’s largest stock exchanges, and Eurex Exchange, one of the largest derivatives exchanges in the world.
In an announcement at the time, the newly appointed CTO of the Deutsche Börse Cloud Exchange, Maximilian Ahrens said “Zimory´s neutral trading IaaS orchestration software is enabling the Deutsche Börse Cloud Exchange to change the way cloud computing infrastructure resources are sold and used. The global distribution of virtual datacenter services will become much easier with standards. Deutsche Börse Cloud Exchange will set standards for the whole industry.”
Amazon Web Service, one of the largest cloud providers also has a Spot Pricing capability. Called Spot Instances, the services “enables you to bid for unused Amazon EC2 capacity. Instances are charged the Spot Price, which is set by Amazon EC2 and fluctuates periodically depending on the supply of and demand for Spot Instance capacity. To use Spot Instances, you place a Spot Instance request, specifying the instance type, the Availability Zone desired, the number of Spot Instances you want to run, and the maximum price you are willing to pay per instance hour.”
All of these commodities have a smaller market size than the estimated $8bn total size of the IaaS market, James Mitchell the chief executive of cloud brokerage Cloud Options points out in a blog post commenting on the deal.
“So let’s not get carried away, the IaaS market is not the size of the $48billion corn market, the $85billion 100oz Gold market or the $124 billion crude oil market, but it is already large enough to get the attention of the world’s largest group of Financial Exchanges,” he writes.
I have to agree with Mitchell on his optimism and will be keeping a close eye on the progress these companies make.
For more details: http://www.forbes.com/sites/reuvencohen/2013/10/02/compute-derivatives-the-next-big-thing-in-commodities/