Cloudy with a Chance of Innovation

  • Lionel Sancenot, Managing Director for Continental Europe at Iress

  • 01.06.2023 06:45 am
  • #cloud

The constraints and costs of the cloud

The adoption of cloud-based data infrastructure has been a main feature of technological advancement for many firms in recent times. 

It’s clear that there are many benefits for all parties in cloud adoption - but there are signs that adoption is beginning to slow across the wider financial markets. Cost-cutting begins to feature highly in many firms’ strategies, as they grapple with global economic uncertainty and sustained market volatility. But in addition to the rising costs of cloud-based solutions, another factor may be standing in the way of adoption - that it is very difficult for organisations to move between providers.

Ofcom, the UK communications watchdog, recently called for a probe into potential anti-competitive practices of the largest players in the UK cloud market. By October 2023, Ofcom will reach a decision on whether to refer these cloud market giants to the Competition and Markets Authority (CMA). So either regulation, or pricing practices for cloud services within the UK could be set to change before too much longer.

Regulation is a hurdle

Looking more globally, regulation remains a challenge for the cloud as factors impacting its adoption vary by region. In several key geographies, for example, Switzerland, China, Turkey, Korea and Taiwan, regulations demand that financial data is stored on local infrastructure, predominantly as a security measure. With data storage in the cloud being inherently decentralised, this raises a significant barrier to cloud adoption as local regulations cannot apply to the operation of the entire, borderless cloud.

Cloud costs stifle innovation

The rising costs of the cloud present additional limitations in a number of areas. One key area is that for data vendors who must innovate to keep pace with clients’ changing needs, the costs for setting up test environments in the cloud are the same as the costs involved in setting up production environments. This obviously makes innovation trickier, as firms across the markets are less likely to trial new products and services in the cloud, with consequential impacts to the amount of innovative new services being developed and moved into production environments.

Scale is another area where the cloud may not provide a suitable platform. For example, storing and transporting data using the cloud is an excellent solution for smaller datasets, but for very large databases, the cost of using the cloud can simply be too high for some businesses. When we also consider the problems with interconnectedness between cloud platforms (via a limited number of cloud ‘on-ramps’ across the world), their usability challenges and the rising environmental cost of power-hungry data centres, the limits of how far the cloud can grow come into sharp focus.

The Netflix effect

Although the Netflix brand has been synonymous with video streaming for many years, it may come as a surprise to some that the streaming giant only officially closed down its DVD rental business in April this year. This was the end of a very long corporate transformation, which in 2016 saw the streaming giant complete the migration of all its streaming operations to the cloud, allowing it to scale its operations rapidly and flexibly, whilst reducing the costs associated with running its own data centres. The scale and affordability of the cloud itself and improving domestic connectivity with the internet also acted as driving factors in Netflix’s cloud adoption.

In 2007, long before the competition, Netflix became the first company to offer streaming services. More than a decade ago, Netflix made a crucial and brave decision leading to what was described as its 'lost year'. It decided to split its streaming and DVD businesses and began shifting its long-term focus to streaming. 

Netflix’s share price suffered enormously - consumers and investors alike were skeptical of the future direction of the home media market, with corporate corpses like Blockbuster Video still relatively fresh. But after weathering the initial storm, Netflix stole an early march as a clear leader to dominate a new market category - streaming companies. Its optimisation of costs meant it could continue to innovate and soon turned its hand to content creation - and the ‘Neftflix Original’ was born, with Lilyhammer its first offering.

Now that its model has proven successful, many other businesses have joined the streaming and eventual content-creation race, notably Amazon Prime, Apple TV and Disney+ to name but a few. The offer of streaming services alone was no longer a differentiator, the competitive battleground became all about content.

The leap of faith by Netflix became possible because of advances in, and the reducing cost of, enabling technologies, both of which were key ingredients in significant market innovation and competition. And competition proved to be beneficial for the consumer, as the overall cost of consuming TV and films via a streaming subscription, competed favourably against the price of buying DVDs, satellite or cable TV packages, or even cinema tickets. 

The innovation these advents allowed offered more and more cost-effective alternatives, as well as a host of new content for the consumer.

Could the same be true of the cloud’s adoption in financial services?

What if competition drove down costs of the cloud in financial markets?

The cloud is unprecedented technology, but parallels can be drawn. For example, we could look at how costs reduced for another unprecedented technology - broadband services. In the US, the cost of broadband per Megabit-per-second (Mbps) has reduced 98% between 2000 and 2020, from an average of $28.1 to just $0.6 per Mbps, driven by more efficient technology, infrastructure investment, competition and regulation. Could the development of the cloud, track the development of broadband?

New technologies and software are being developed constantly and cloud providers are now not the only shows in town. Technologies, such as the open-source containerised management system Kubernetes, are emerging to offer alternatives.

But in addition to alternatives to the cloud, if the ‘Netflix-ification’ of financial services because of the cloud, reduces the cost of the cloud itself over time, we may see the next great explosion of innovation, as testing and trialing cloud-based solutions would become more economically viable for businesses to implement.

As the cost of the cloud reduces, there may also be more impetus for global alignment on regulation, meaning the benefits of cloud-based infrastructure could reach a much wider global user base.

The forecast is cloudy

If the development and adoption of the cloud does indeed mimic the development of broadband and costs reduce over time, the benefits for financial firms would be significant. With lower cost cloud, businesses can reduce their costs, scale their businesses more easily and invest in content or products and services innovation. Lower cost cloud would mean that even smaller businesses would have the resources to take advantage of the cloud, meaning enhanced competition between financial services organisations, which would be extremely healthy for the businesses and individuals that consume financial products and services.

For the providers of the cloud, business models may change. Whilst the cost of their services comes down, more businesses can afford to use the cloud, meaning lower margins could be offset by potentially higher volumes of business. 

So whilst it is difficult to predict when this ‘tipping point’ in the democratization of cloud services may arrive, the future will almost certainly herald a lower-cost cloud, encouraging more innovation and helping more businesses across the world to benefit.

The future of financial services IT infrastructure will remain cloudy, but with an increasing chance of innovation.

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