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Sunday
Feb122012

The Cloud Business Model

The cloud business model is a freemium or premium subscription-based model. It is the internet's most natural business model for selling software or content. Companies are beginning to realize that it is not a good idea to charge for bits. You need to charge for service instead.

Media in the cloud

Selling digital music is equivalent to selling bits. But bits have no value. That is why piracy is a misnomer. Sharing digital music is not perceived to be a crime precisely because the process of copying bits incurs no cost and happens instantaneously—leaving the original intact.

What the music industry really needs is business model innovation. It needs to replace the model of selling bits with a model that charges for service. Many people have laughed about iTunes Match because it can be used to whitewash pirated music. What they don't understand is that Apple's new model is a way to finally charge people for listening to pirated music. And it charges for the service, not for the bit: $24.99 a year. That's the cloud business model.

Spotify is another such model. These models will replace the old ones and piracy will disappear, naturally. Piracy will then once again be known as what it really is: sharing. The same reasoning applies to movies in the cloud and other digital content in the cloud.

Software in the cloud

Apple's App Store delivers software through the cloud and synchronizes it to all devices a particular user owns. It also slowly shifts from selling paid apps to upselling via in-app purchases and, more recently, to selling subscriptions and thus charging for usage instead of bits. That is the cloud business model.

Adobe just announced Creative Cloud, a radical shift in Adobe's monetization strategy for its Creative Suite software package. In the near future, Photoshop, Illustrator, and the likes will be available via the cloud, for a flat monthly fee. Buying big software packages for huge amounts of money—and then paying again and again for updates—will be a thing of the past.

I believe that this is only the beginning. The cloud business model will eat the whole software industry. Charging for the service instead of charging for the bit will become the norm. Consumers will want to subscribe to use a software, they will not want to own it.

Infrastructure in the cloud

The Amazon Web Services are an unbelievable success. They are all powered by the cloud business model which Jeff Bezos famously calls the "pay by the drink" model. Paying by the drink makes sense for all digital infrastructures. It enables an entire bottom-up stack of service layers called SaaS. Heroku is just one success story living on top of the AWS foundation.

Most web-app businesses follow the subscription-based model. They enable the creation of component-based businesses with almost no up-front costs. While the advance of the cloud business model keeps transforming the internet industry, fixed costs will slowly be replaced by variable costs.

The shift in cost structures will enable more and different kinds of companies. Companies we have never seen before. Companies that would have never been able to exist only a decade ago. We will see the rise of many more highly scalable web companies.

The internet success story has just begun.

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