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Electricity and Computing as Commodities

February 25th, 2005 · No Comments

Jonathan Schwartz writes:

You may recall one of my first blog entries assessed the fitness of the word “commodity” for the computing marketplace. Distilled to a single sentence, my conclusion was that despite the self-interested rhetoric of some vendors (and gullibility of a few pundits), computers weren’t the commodity – computing (and bandwidth) was. Just as power generators built by my friends at GE aren’t the commodity, electricity is. It’s not even close to a subtle distinction.

In looking at the evolution of the commodity called computing, history provides an extraordinary parallel to the evolution of electricity. In fact, if you haven’t read it, I’d highly recommend “Empires of Light,” by Jill Jonnes. It’s a very entertaining historical examination of how electricity was first discovered (rubbing amber produced mysterious sparks), reliably generated, and ultimately distributed across the world.

It took about a decade for those deploying electricity to settle on a few standards that ultimately accelerated consolidation. From voltage to cycle to plug configuration. (The processes used to get there, although they involved far more violence and loss of animal life, bear a remarkable resemblance to standard setting in the computing industry.) Spooling forward, once the standards existed, businesses could plug into a grid – labor markets went through a fairly sizable dislocation (all those engineers and “CEO’s” had to find other work), but electricity was firmly established as a ubiquitous service. Scale efficiencies and the resulting massive decrease in price allowed the government to bridge the power divide through rural electrification. Electricity that started out 20 times the price of gas lighting – obviously got a lot cheaper.

What’s most interesting to me is that once the standards were set, and the grid powered up, electricity finally established a transparent price – the hallmark of a true commodity. If pricing isn’t transparent, products can’t be deemed a commodity – by transparent, I mean equivalently defined for a standard unit of measurement. Here are a few examples, “5 cents per kilowatt hour,” “2 dollars per gallon.” It’s either a standardized physical delivery (gallon, barrel, ton), or unit of consumption (typically time based, 100 megabit hours, megawatt hours, etc.) – but it’s the same across the industry.

In my view, the great thing about commodities, whether financial services, telecommunications, oil and gas, and now computing – is that the companies whose business it is to monetize those commodities, along with the businesses that supply the technologies necessary to compete in a commodity market, are among the largest on earth.

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