CloudAve contributor Krishnan Subramanian discusses the recent trends in the enterprise PaaS space. He distinguishes three models of service delivery: the Heroku Model, the Amazon Model, and the Federated PaaS Model. The Heroku Model is a closed monolithic platform, the Amazon Model is a closed modular platform, and the Federated PaaS Model is a platform that can be set up across multiple infrastructure providers.
Open Source PaaS and the Hold-up Problem
We all have experiences with the first two models (e.g. App Engine and AWS) and I guess that most people would agree with me that building scalable and robust Web applications has never been easier and more fun. However, both models have a significant disadvantage as they are (must be?) based on proprietary software. Michael Schwarz and Yuri Takhteyev argue that proprietary software creates economic inefficiencies and that open source is a solution to these inefficiencies in some sectors. I strongly believe that the enterprise cloud computing marketplace is one of these sectors.
Schwarz and Takhteyev explain that proprietary software is a source of economic inefficiency because it can lead to the hold-up problem and thus cause underinvestment in complementary technologies. Let me give you an example. You build an application (complementary technology) and deploy it to a closed PaaS. A few months later, the platform service provider sends you a letter to inform that unfortunately the prices of the service offering will rise. If you anticipate this situation, you might not wish to build the application in the first place (underinvestment). The main problem is that when you build the application, the bargaining power of the platform service provider increases and he can negotiate higher prices or support fees ex post.
Why is the hold-up problem a particularly significant problem in cloud computing? Because off-the-shelf software does not work for large-scale applications. This is the reason why every major Internet company built their own (usually proprietary) distributed data stores (GFS, BigTable, Dynamo, Cassandra, …). These software systems are highly customized for specific types of applications. Now back to Schwarz and Takhteyev: proprietary software (binary) is an excludable good; source code is de facto non-excludable (you can copy it). This means that you can only get access to the proprietary software and execute modifications through the software vendor (same argument for services by replacing “software” with “service”). With open source software, you do not depend on the software vendor to implement the features that you need for your specific application. You can go ahead and build it yourself.
By the way, Salesforce explores a different path to solve the hold-up problem: vertical integration of Heroku. I guess this makes sense for Salesforce, considering the closed nature of their platform.
Conclusion
The closed PaaS model creates economic inefficiency, not only because of monopoly pricing but also because of the hold-up problem. The hold-up problem increases the bargaining power of the platform provider when the platform user makes complementary investments. This problem can become particularly unpleasant for enterprises who want to innovate and cannot depend on the platform provider to implement the technologies they need. It can also be a problem for enterprises that compete in a similar sector of the IT industry.
Open Source PaaS (Cloudfoundry, OpenShift) is a solution to this problem. You can set up the platform in a federated environment and migrate to a different infrastructure provider (data center, compute cloud) if the cost structure changes. Moreover, you can modify the software and adjust it to the particular requirements of your applications.
Nevertheless, the Open Source PaaS model can only be a success if the community provides the necessary input to make these platforms as stable as App Engine and Heroku.
