Digital and technology

Economics in the cloud

6975378_l agendaNi sums up differing perspectives on the cloud’s economic potential.

Much of the economic analysis regarding cloud computing is written by consultants within the industry but external observers also recognise its potentially positive impact.

Frederico Etro, a professor of economics at the University of Venice, is one of the most optimistic analysts. Etro has written extensively on cloud economics and he spoke on the subject at the Institute of International and European Affairs in Dublin in May 2010.

He expected that 300,000-400,000 new businesses (mainly SMEs) could be created in the EU over a five-year horizon. This could result in around 1 million jobs, a potential 0.2-0.5 per cent reduction in the unemployment rate, and 0.1-0.3 per cent GDP growth.

“It all depends on the speed and diffusion of this type of technology,” he explained. Etro saw a case for more European co-ordination e.g. common fiscal incentives, broadband investment and cross-border data portability. Indeed, the perceived risks for data security and privacy were the main worries for businesspeople.

Small countries, such as Ireland, can attract proportionally large inward investments. Etro suggested a government subsidy to cover the initial costs of cloud start-ups. Benefits for the private sector included the reduction in the fixed cost of ICT (across all sectors), a reduction in management costs, and the potential for new products and services (such as facebook apps).

The impact on each sector, though, depended on the level of ICT spending taking place. ICT takes up around 20 per cent of budgets in telecoms firms but less than 5 per cent in construction and footwear which depend on machinery and manual labour. New technology can improve efficiency and profitability, which in turn will attract new firms into the market and lead to lower prices and higher wages: a “virtuous circle”.

Within government, many agencies have “periodic spikes in usage” and therefore can simply rent services rather than investing heavily in ICT. Energy savings can contribute to a reduction in carbon emissions.

Jonathan Liebenau and Patrik Karrberg lecture on business management at the London School of Economics and are more sceptical. Job creation trends “fall short of being dramatic” according to Liebenau and Karrberg’s study (Modelling the Cloud, January 2012) but they do confirm that “the employment outcomes are likely to be positive, creating more jobs than destroying.”

The authors estimated that cloud computing could create an extra 12,100 jobs (direct, indirect and induced) in UK aerospace and 13,990 in the UK smartphone services sector in 2014. Estimates for the USA, Germany and Italy follow similar trends.

The economic effects of cloud computing are presumed to be “extensive, even transformative” but they are also hard to quantify. Liebenau and Karrberg look at the issue from the bottom up, accounting for how particular tasks are carried out, and the potential for job displacement and job creation.

Investors in new firms can annualise costs for IT into “chunks” that are easier to fit into a business plan. Cloud computing allows IT to be mapped into particular services and this cost can be “more accurately factored into the product price.” The two academics also noted that policy support for cloud computing should go beyond the traditional tax incentives. Energy pricing and incentives for green sources of power can make “a major difference” to a country’s ability to attract investment as data centres tend to be energy-intensive.

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