Saturday, August 31, 2013

Punctuated equilibriums and boiling frogs

For many years, I've talked about the power of punctuated equilibriums in our economic and technological systems.  These occur during an economic state known as 'war' which is caused by the commoditisation of a pre-existing act after a more relatively 'peaceful' period of product competition. 

These punctuated equilibriums are dangerous to companies because of :-
  • the inertia to change that is created by successful business models built during the more peaceful competitive state.
  • the likelihood we will underestimate the speed of change due to the previous more peaceful and slower changing competitive state.
  • the exponential nature of the change.  This exponential growth is driven by numerous factors including compound forces of adaptation i.e. the benefits of cloud (efficiency, agility in higher order systems, new sources of wealth creation) encourage competitors to adapt, the more our competitors adapt the greater the pressure on us to adapt becomes just to retain our relative competitive position (this is known as the Red Queen effect).
These days with cloud, I see all the signals of a punctuated equilibrium plus all the usual consequences of people misunderstanding exponential change.  They believe that they have time because the market of cloud is just a "small fraction of the computing market" etc. 

Hence, I provide the following as a sobering reminder. This is an estimated growth of AWS updated with various analysis statements (NB. Amazon is very careful not to publish actual figures, this is based upon analysis of Q4 figures and calculating a forward revenue i.e. by the end of 2015, I calculate that AWS forward revenue will be over $15 billion p.a.) with a % figure of revenue vs world wide server revenue.  Currently this stands around 3% but these figures are not as important as the growth rate.  Assuming Amazon continues on the estimated growth rate from the past six years then it'll probably represent somewhere between 30-50% of worldwide server revenues during 2017.  

Such a rapid change would not be unusual as we've experienced punctuated equilibriums in many forms of systems - environmental, economic, biological and technological.  However, this might be a bit of shock to those applying a linear model of growth (hence the delta of "future shock").  In fact, the only thing shocking is that people don't understand basic concepts like exponential change. 

In the cloud world this translates to companies thinking the effects are minor and rather than seeing the changes as a threat to the company, they often believe that they have time to exploit and manage the transition to this new revenue stream. It's like frogs discussing how the cold water they are in has warmed up and it feels quite pleasant and certainly manageable. 

So, if exponential growth is not something you're truly familiar with, then in order to do my bit for the community - please watch the following Dr Bartlett video on Arithmetics, Population and Energy as recommended by a good friend of mine, Artur Bergman.

[9th April 2015 - the video is no longer available]

-- 29th January 2016

The model is spiked. Actual revenue in 2015 did not exceed $8Bn but $7.8Bn. The actual run rate for Amazon by the end of 2015 was $10Bn (assuming this includes growth). I had AWS down for >$15.5Bn revenue in 2016 (i.e. each year after 2015). Oh, well.