The Economic Impact of Cloud Computing in the EU

Transcription

1 The Economic Impact of Cloud Computing in the EU Jerusalem March 19, 2012 Professor Federico Etro University of Venice Ca Foscari

2 What will be the impact of cloud computing on business creation and on the public sector in Europe? What are the opportunities emerging from this new technology and how should Europe exploit them? Some references: 2010, Endogenous market structures and business cycles, Economic Journal (with A. Colciago) 2010, Real business cycles with Cournot competition and endogenous entry, Journal of Macroeconomics (with A. Colciago) 2009, The economic impact of cloud computing on business creation, employment ans output in Europe, Review of Business and Economics

3 Chapter 1.9: The Economic Consequences of the Diffusion of Cloud Computing - The Economics of Cloud Computing, IUP Journal of Managerial Economics, Vol. IX, 2, pp Understanding Cloud Computing, 2011, European Business Review

4 Key message: - General purpose technologies have a large impact on business creation, market structures and macroeconomic variables - Simple exercise to estimate the adoption of Cloud computing in the private and public sector in the E.U. over the next years: - strong impact on business creation in terms of new SMEs - substantial impact on employment and GDP growth especially if policy will promote a rapid adoption - non-negligible impact on public finances

5 a definition: Cloud Computing refers to an Internet-based General Purpose Technology through which information is stored in servers and provided as a service (software, platform, or infrastructure as a service) and in a pay-per-use and selfservice way to clients

6 Benefits of cloud computing: - For the private sector: - Generalized reduction of fixed costs for ICT (for every industry) - Pay for use (shift from capex to opex) - Lower and predictable costs (resource pooling, rapid elasticity) - Lower Management costs (no maintenance, faster deployment) - Higher productivity (constant software updates, universal access) - Multilateral network effects between businesses - Energy savings: contribution to the reduction of carbon emissions (power usage effectiveness from 2 to 1.2)

7 Benefits of cloud computing: - For the public sector: - efficiencies in - Healthcare (information and technologies in remote or poorer locations) - Education (e-learning) - e-government (and agencies with periodic spikes in usage) - Our focus on the reduction in fixed costs in the private sector

8 Competition issues The introduction of cloud computing is going to be gradual. Currently, we are in the middle of a phase of preparation with a few pioneers offering services that can be regarded as belonging to cloud computing, often derived from internal solutions (turning private clouds into public ones). Amazon Cloud Computing was launched in October 2006, IBM s Blue Cloud in November 2007, followed by cloud solutions by Google and Microsoft. Meanwhile, many large high-tech companies as Amazon, Google, Microsoft, Saleforce.com, Oracle and others keep building huge data centres loaded with hundreds of thousands servers to be made available for customer needs in the near future.

9 Competition issues Competition between these companies is probably going to reshape the ICT market structure as PC distribution did in the 80s. This may raise some concern for competition and for the consequences on the users of cloud services. On one side, the strength of competition for the provision of cloud services suggests that multiple players (as those mentioned above and, possibly, others) would probably share the market for a while avoiding excessive concentration. The importance of cloud computing in changing the prevailing business model in ICT is determining wide investments in innovation by these same players, therefore the ultimate success in the cloud business will be associated with the creation of superior technologies rather than with the exploitation of network effects or barriers to entry. On the other side, the development of alternative cloud computing solutions could create the risk of being locked-in for potential customers. To avoid this, it is important to promote, especially in this initial phase, agreements between public authorities and industry leaders on a minimum set of technological standards and process standards to be respected in the provision of cloud services to guarantee data security, privacy and portability.

10 The Economic Impact of Cloud Computing Methodology: Simulation of the diffusion of a new technology reducing the fixed cost in a Dynamic Stochastic General Equilibrium model with Endogenous Market Structures calibrated on the European economy Background data: Eurostat (and ebusiness Reports) Aggregate sectors: manufacturing wholesale & retail trade services, hotels & restaurants transport storage & communication real estate, finance and other business activities

11 Footwear Pulp & Paper ICT manufacturing Consumer electronics Shipbuilding and repair Construnction Tourism Telecommunication Hospitals activities Average share of ICT budget as % of total costs (by sector)

12 Simulation of the response of the main macrovariables to a fixed cost shock

13 Conclusions on the (conservative) estimates of the impact of Cloud Computing in E.U.: - strong impact on business creation: hundred thousands new SMEs - substantial impact on employment (more than a million new jobs), the unemployment rate (reduced by 0.1/0.3 %) and GDP growth (increased by 0.1/0.4%)

14 Impact on Employment Manufacturing Trade Services, hotels.. Transport&Com.Finance&other Total Slow Fast Slow Fast Slow Fast Slow Fast Slow Fast Slow Fast Belgium Czech Rep Denmark Germany Ireland Greece Spain France Italy Hungary Netherlands Austria Poland Portugal Romania Slovakia Finland Sweden UK EU Creation of new jobs after a year from the beginning of adoption Legenda : Slow stands for slow adoption of the new technology, while Fast stands for fast adoption

15 Impact on Employment Manufacturing Trade Services, hotels.. Transport&Com.Finance&other Total Slow Fast Slow Fast Slow Fast Slow Fast Slow Fast Slow Fast Belgium Czech Rep Denmark Germany Ireland Greece Spain France Italy Hungary Netherlands Austria Poland Portugal Romania Slovakia Finland Sweden UK EU Additional creation of new jobs in the fifth year since the beggining of adoption Legenda : Slow stands for slow adoption of the new technology, while Fast stands for fast adoption

16 Job creation/destruction: - jobs in IT departments can be often reallocated easily - Cloud Computing offers new innovation and business opportunities that can be exploited with the skills of IT departments - New Business adopting Cloud Computing does not generate job destruction! - Our projection: 8 to 1 ratio

17 Public sector - case studies: -The city of Los Angeles has switched to a Google-based online solution for its services in 2009: the estimated cost reduction was around 25 % - A similar switch took place in Washington, D.C. with estimated cost savings around 50 % - The switch to a Microsoft-based online solution of the services of the Californian town of Carlsbad created cost savings of 40 % - Higher savings associated with the adoption of a cloud computing solution for service hosting and mapping technologies of the city of Miami - A SalesForce.com solution was employed by the U.S. State Department for budget information and led to cost reductions around 75% - Private clouds have been adopted by NASA

18 Public sector - In September 2009 the Obama Administration has instituted the FCCI (Federal Cloud Computing Initiative), with the purpose of promoting standards and rules for the adoption of online services to reduce the $ 76 billion spending of the American government in IT. - U.K. is trying to move to the cloud its IT assets at a rate of 10 % a year, a wise gradual approach to reduce the 16 billion spending of the British government in IT. - China is also promoting CC at the local government level

19 Public sector - simulation: Contribution to the reduction of the deficit/gdp ratio: 0.1% to 0.2% due to: - direct cost reduction in the public sector - additional tax revenues due to the additional growth

20 Policy implications for EU: Part of the positive effects are positively related to the speed of adoption > a case for coordination within the union of policies with spillovers, for instance: - Impulse from the adoption in the public sector - fiscal incentives and promotion of cloud computing in particular dynamic sectors - expansion of the broadband capacity; - common business-friendly rules for unrestricted flow of data across borders (since data centres are located in different countries with different privacy laws, data portability remains a key issue for the diffusion of CC); - agreements between EU authorities (and industry leaders) on a minimum set of technological standards and process standards to be respected in the provision of CC services to guarantee data security and privacy;

21 Small economies in the EU: In a context as the European one, smaller regions would be able to obtain larger gains from similar policies at least in the initial phase, because they would easily attract FDIs from larger countries. In a period of increasing limits to other forms of fiscal competition a policy of subsidization of CC (without discrimination across firms of different member countries) could generate substantial capital flows toward smaller regions with good general infrastructures. for instance, governments could finance, up to a limit, the variable costs of computing for all the (domestic and foreign) firms that decide to adopt a cloud computing solution