Amazon Spot Market Critical Step for Cloud Computing

(MoneyWatch)  Much of the focus on cloud computing has been on the technology, who's offering it, and who's using it. But any time you look at new ways of doing business, you eventually get back to the perennial questions of how the business model works and what pricing will be. Amazon's (AMZN) announcement of spot pricing for EC2 resources is actually a critical stage in the development of cloud computing overall, offering an important institutional facility as well as a challenge that will start to face IT departments and vendors alike.

With Spot Instances, customers bid on unused Amazon EC2 capacity and run those instances for as long as their bid exceeds the current Spot Price. The Spot Price changes periodically based on supply and demand, and customers whose bids exceed it gain access to the available Spot Instances.

What makes this announcement important is that it pushes cloud computing into a direction that it must ultimately take if it is to fulfill its promise: a position as a commodity. Only when goods and services reach that status can you be sure that prices have reached their minimum under given conditions. Although not perfect, it's as close to the theory of perfect market pricing, where demand and supply meet and cost is arbitrated through the bidding process.

Think of any mature industry, from electronics to chemicals, and you can be sure that there is a spot market. But some big challenges face both buyers and sellers in the IT industry. Never before has computing literally become a traded commodity in this way. That will put an enormous challenge on many suppliers who sell to the cloud vendors. They will likely find big and often unpredictable shifts in what they can charge for their goods. After all, when you're in a commodity business, you start becoming adept at finding ways to use products from almost any source, because you're now being driven by pricing pressures. That means their customers are going to demand the same flexibility and discounts that they offer corporations.

At the same time, buyers are going to find this a new and confusing world. IT departments will likely have to work more closely than before with purchasing departments to safely navigate the bidding process and to start thinking in a dynamic and short-term way about computing capacity.

All in all, it's an important development, but it brings up some of the big issues that vendors and CIOs haven't yet begun to really consider, and that will occupy them more thoroughly than they'd like to think.

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