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Breakthrough Economics: The Price of the Cloud

In a provocative presentation at the Capital Markets Cloud Symposium, Dr. Howard Rubin, founder of Rubin Worldwide and a WS&T columnist, shared some data on the current IT landscape. His findings, boiled down here to a few bullet points, show that banks are spending a ton of money on IT but are still seeing a fraction of the value.

He also discussed, at length, how companies that master cloud computing will be able to break the 80/20 rule of technology investment (where 80 percent of IT budgets are traditionally spent on infrastructure, leaving only 20 percent for new development). Also, he speculated that once cloud computing becomes a commodity, it might get its very own futures market.

Here are some factoids from the good professor:

  • The US Dept of Labor estimates that those in today's labor force will 10 to 14 jobs by the age of 38. (My father worked as an engineer for the Long Island Lighting Company for 38 years when he retired in 1994. -- Ed.)

  • In 1997, a gigabyte of flash memory cost $7,870. Today it costs $1.25.

  • We now live in a global IT community. IT spending is growing and yet slowing. In 2009 IT spending was $4.2 trillion and it has grown 3.2 percent to $4.35 trillion.

  • Did you know that the computer in your cell phone is a million times cheaper, a thousand times more powerful, and a hundred thousand times smaller than the one computer installed at MIT in 1965.

  • The State of Financial Services Sector -- Pressures:
    2009 was the year of cutting costs. 2010 and 2011 are the years of growing revenues through new initiatives while still preserving capital and cutting costs

  • And a resurgence of 2nd and 3rd tier firms, along with growth of new ventures, has increased the demand for cost conscious technology solutions. The "total cost of trade" is directly related to the total cost of Information Technology

  • Technology and Its Costs are Growing
    Of the $40B+ annually the top banks are now spending on technology (this is equal to Goldman Sachs' 2010 net revenue), 70% (about $30B -- the size of Morgan Stanley's 2010 Net Revenue) is consumed by data management, data distribution, front office systems, and the core infrastructure.

  • If you create a composite "mega-bank" with 10 leading institutions and compare their performance in 2010 versus 2006, you will find:
    - Employee Headcount changes 0.0%
    - Technology spend per Employee increased 17%
    - Computing Power (MIPS & Servers) increased 74%

  • Cloud Economics -- The "New Math" of IT: With the new economics of consolidation scale and Moore's Law at work, the same set of infrastructure services that cost ~$500M+ in 2007 will likely be delivered by the most efficient companies for ~$295M in 2010 and for $132M for those that have moved to the "cloud." The savings can be recycled to create new forms of value.

  • The Cloud is the "Commons" for the 21st Century
    - Core IT functions supporting the enterprise for economies of scale and moving to the Cloud
    - Business segment specific functions managed from a business perspective for economies of yield in their own Cloud
    - Leveraging of the marketplace: the true commons is the Cloud

  • If cloud becomes a new commodity, will there be a futures market?
Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio

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