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Something happened in the first years of the 20th century that would have seemed unthinkable just a few decades earlier: Manufacturers began to shut down and dismantle their water wheels, steam engines and electric generators. Since the beginning of the Industrial Age, power generation had been a seemingly intrinsic part of doing business, and mills and factories had had no choice but to maintain private power plants to run their machinery. As the new century dawned, however, an alternative started to emerge. Dozens of fledgling electricity producers began to erect central generating stations and use a network of wires to distribute their power to distant customers. Manufacturers no longer had to run their own dynamos; they could simply buy the electricity they needed, as needed, from the new suppliers. Power generation was being transformed from a corporate function to a utility.
Almost exactly a century later, history is repeating itself. The most important commercial development of the last 50 years — information technology — is undergoing a similar transformation. It, too, is beginning an inexorable shift from being an asset that companies own in the form of computers, software and myriad related components to being a service that they purchase from utility providers. Few in the business world have contemplated the full magnitude of this change or its far-reaching consequences. To date, popular discussions of utility computing have rarely progressed beyond a recitation of IT vendors’ marketing slogans, laden with opaque terms like “autonomic systems,” “server virtualization” and “service-oriented architecture.”1 Rather than illuminate the future, such gobbledygook has only obscured it.
The prevailing rhetoric is, moreover, too conservative. It assumes that the existing model of IT supply and use will endure, as will the corporate data center that lies at its core. But that view is perilously shortsighted. The traditional model’s economic foundation already is crumbling and is unlikely to survive in the long run. As the earlier transformation of electricity supply suggests, IT’s shift from a fragmented capital asset to a centralized utility service will be momentous. It will overturn strategic and operating assumptions, alter industrial economics, upset markets and pose daunting challenges to every user and vendor.
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1. There are notable exceptions. See, for example, M.A. Rappa, “The Utility Business Model and the Future of Computing Services,” IBM Systems Journal 43, no. 1 (2004): 32–42; and L. Siegele, “At Your Service,” Economist, May 8, 2003 (a survey of the IT industry).
2. The term was introduced in a 1992 paper by T.F. Bresnahan and M. Trajtenberg, later published as “General Purpose Technologies: ‘Engines of Growth’?” Journal of Econometrics 65, no. 1 (1995): 83–108. See also E. Helpman, ed., “General Purpose Technologies and Economic Growth” (Cambridge, Massachusetts: MIT Press, 1998).
3. A. Friedlander, “Power and Light: Electricity in the U.S. Energy Infrastructure, 1870–1940” (Reston, Virginia: Corporation for National Research Initiatives, 1996), 51.
4. D.E. Nye, “Electrifying America: Social Meanings of a New Technology” (Cambridge, Massachusetts: MIT Press, 1990), 236.
5. T.P. Hughes, “Networks of Power: Electrification in Western Society, 1880–1930” (Baltimore, Maryland: Johns Hopkins University Press, 1983), 106–139; and R.B. DuBoff, “Electric Power in American Manufacturing, 1889–1958” (New York: Arno Press, 1979), 42–45.
6. For more on Insull’s career and accomplishments, see Hughes, “Networks,” 201–226; and H. Evans, “They Made America: From the Steam Engine to the Search Engine: Two Centuries of Innovators” (New York: Little, Brown, 2004), 318–333.
7. “The Systems and Operating Practice of the Commonwealth Edison Company of Chicago,” Electrical World and Engineer 51 (1908): 1023, as quoted in Hughes, “Networks,” 223.
8. DuBoff, “Electric Power,” 40.
9. For a discussion of the homogenization of information technology in business, see N.G. Carr, “Does IT Matter? Information Technology and the Corrosion of Competitive Advantage” (Boston: Harvard Business School Press, 2004).
10. A. Andrzejak, M. Arlitt and J. Rolia, “Bounding the Resource Savings of Utility Computing Models,” working paper HPL-2002-339, Hewlett-Packard Laboratories, Palo Alto, California, Nov. 27, 2002.
11. V. Berstis, “Fundamentals of Grid Computing,” IBM Redbooks Paper, Austin, Texas, Nov. 11, 2002; www.redbooks.ibm.com/redpapers/pdfs/redp3613.pdf.
12. C. Hildebrand, “Why Squirrels Manage Storage Better Than You Do,” Darwin, April 2002, www.darwinmag.com/read/040102/squirrels.html.
13. B. Gomolski, “Gartner 2003 IT Spending and Staffing Survey Results” (Gartner Research, Stamford, Connecticut, Oct. 2, 2003).
14. Effective and standardized metering systems will be as crucial to the formation of large-scale IT utilities as they were to electric utilities, and work in this area is progressing rapidly. See, for example, V. Albaugh and H. Madduri, “The Utility Metering Service of the Universal Management Infrastructure,” IBM Systems Journal 43, no. 1 (2004): 179–189.
15. Although the shift to utility supply will reduce the need for in-house IT staff, companies will likely maintain groups of professionals with both technical and business skills to ensure that the purchased IT services are properly configured to support in-house processes and vice versa.
16. Google and Amazon.com already provide utility IT services. Companies draw on Google’s data centers and software to distribute advertisements over the Internet and add search functions to their corporate Web sites. Amazon, in addition to running its own online store, rents its sophisticated retailing platform to other merchants such as Target, JCPenney and Borders.
17. C.M. Christensen, “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” (Boston: Harvard Business School Press, 1997).
18. It’s telling that today’s vendors of utility IT services such as hosted applications and remote data centers have been among the most aggressive adopters of open-source software and other commodity components.
19. Nye, “Electrifying America,” 170–174.