Cloud, Sofas & Economies of Scale

gotcouchAdobe recently announced its moving all its “boxed” software to the cloud under a subscription service. Some analysts claim that this is due to changing customer tastes. However, there is a stronger underlying reason. It’s to exploit economies of scale via the cloud, reduce costs and increase direct margins from product delivery. The decision might seem risky but it makes absolute sense. The only other facet of concern might be when reporting revenues. GAAP rules mean that Adobe will have to change from transaction based revenue – i.e. one time revenues need to be booked gradually. This deference in revenues will mean depressed earnings when the switchover happens.

The strategy by Adobe is nothing new. I recently read a fantastic article by Jon Evans from Techcrunch where he makes the point about economies of scale offered as a service. For example, chip fabrication is best left to those that can exploit economies of scale via their efficient manufacturing plants, whereas chip designers can channel all their resources and capabilities into creating a better chip. Simple idea but powerful nonetheless. The same analogy can be used for cloud services. Amazon, Google, Microsoft et al are all battling to provide exactly the same service – subscription based economies of scale to those in need. For example, education institutions that offer online platforms to augment in class learning use Amazon or its competitors to host their platform. Not only is it easily scalable, the economics of it make it unbeatable in terms of price and operating costs (from the provider). Furthermore, it’s safe, always accessible and fast.

“Economies of Scales as a Service” – EOSS. There you have it. It’s not the next best “Aha!’ moment or the next novel business model, but its introduction has very familiar roots – excess capacity. Whether its overcapacity in terms of human capital, overcapacity in terms of cars or excess capacity in terms of available places to stay when you travel, there are services that exploit this excess capacity. The business models that utilize these – you’ve heard of them – AirBnB, Car Sharing services and of course your friendly neighborhood cloud service provider. Even human talent pools that suffer from excess capacity in a few areas offer great potential – Taproot helps non-profits do great things by exploiting excess capacity from talented professionals (including me).

Costs and more costs. We want to reduce them and increase profitability. So why not use existing over capacities to achieve that – while generating revenue and helping others? This is the shift. While I draw the line at renting my couch (which certainly has ridiculous excess capacity) – CouchSurfing can offer you a couch when you’re in town. What do you think you can offer?

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