The rise of cloud computing - minding your P's and Q's

The rise of cloud computing

1. The Rise of Cloud Computing: Minding Your P’s and Q’s (and K’s) David Byrne, Federal Reserve Board Carol Corrado , The Conference Board and Georgetown University Dan Sichel , Wellesley College and NBER June 4, 2018 World KLEMS The views expressed by the authors are not intended to represent the official views of the Institutions with which they are affiliated. Sichel is grateful for financial support from the Bureau of Economic Analysis and the National Telecommunications and Information Administration.

2. Overview Definition of “cloud” computing How prevalent is cloud computing? (Q) How large is investment by cloud providers? (K ) How fast are cloud prices falling? (P)

3. Overview: Bottom Line Q : Cloud growing very rapidly. Fundamental transformation underway. K: ICT investment by cloud providers large. Some may be missed in NIPAs. P: Prices of cloud services falling quickly , esp. since 2014. Matters for industry real GDP.

4. Definition of the Cloud

5. Definition of the Cloud NIST, 2011: a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources. Image source. Wikipedia. Created by Sam Johnston.

6. Households Information Technology Landscape Computing Communications Entertainment Electronics Key Software & Content Providers Mobile Users Firms Office Datacenter Amazon Google Microsoft Internet Service Providers Salesforce.com ADP Oracle Netflix Facebook Youtube Cloud Service Providers

7. Households Information Technology Landscape Computing Communications Entertainment Electronics Key Software & Content Providers Mobile Users Firms Office Datacenter Amazon Google Microsoft Internet Service Providers Salesforce.com ADP Oracle Netflix Facebook Youtube Cloud Service Providers Compute, Storage, & Platform Services

8. Q’s

9. Tracking in National Accounts Broad categories that include cloud generated gross output over $903 billion in 2015. Bigger than broadcast and telecom. But, to truly isolate cloud service flows, need finer industry/product detail .

10. How fast has cloud grown? (Global)

11. K’s

12. K’s: CAPX by Major Cloud Providers

13. But seems not to be reflected in NIPA IT investment NIPA IT investment tracked the telecom boom in the late 1990s … But not the cloud boom A puzzle? Possible resolutions Global v. domestic Not all capex is IT Unmeasured own-account investment

14. Own-account investment? Focus on IT service industries that include cloud. P urchase a lot of electronic components Boards, MPUs, memory, disk drives. How are the electronic components used? C loud providers doing final assembly and installing proprietary software. Make table => no final electronics produced by cloud industry groups. Suggests own-account investment

15. Augmented IT investment

16. P’s

17. P’s: Data on cloud services Amazon Observations Product Prices Compute 4,079 Database 5,340 Storage 445 Scraped price data from Web Archive Cloud Service Products from Amazon Web Services (AWS) Compute (renting virtual machines) Storage (renting storage) Database (user-developed apps) Prices and characteristics 2009 -2016, quarterly

18. Methodology Compute: adjacent-quarter hedonic regressions Database : adjacent-quarter hedonic regressions Storage : matched model

19. P’s: Rapid price declines, esp. since 2014 Price s for AWS Cloud Service Products (percent change, annual rate) 2009-2013 2014-2016 Compute (EC2) Google -5.1 -10.5 - 11.4 Database (RDS) -3.3* -22.6 Storage (S3) -12.1 -25.1 * Sample for RDS starts 2010:Q2

20. S uggest ongoing technological progress (and mabye margin declines) Consistent with other evidence on ICT technical progress Nearest price in accounts (514) has very different trend, increasing at average of about 1 percent a year. Matters for allocation of real GDP across industries. Implications of rapid price declines

21. Summary Q’s : Explosive growth in cloud service flows. Fundamental transformation underway. Hard to isolate in NIPAs K’s: CAPX by cloud companies is large and growing fast ICT investment may be understated in national accounts Greater K deepening => future productivity gains ? P’s: Rapid cloud service price declines Indicates continued technical progress in ICT Matters for allociation of GDP across industries

22. The paper in Haiku Cloud grows super fast H ard to measure P’s and Q’s Let us not miss it

23. Use NIPA fixed investment by type IT investment for industries: 514 Data processing, internet publishing, and other information services 5415 Computer systems design and related services 511 Publishing industries, except internet (includes software ) Equipment and software investment has increased moderately since 2009. Still a puzzle IT investment by cloud providers