The utility business model and the future of computing services.

The idea of utility computing has received attention recently and for good reason. The use of computers continues to be a rapidly expanding feature of modern society, and industry has come to rely on computers to perform a multitude of tasks beyond simple data processing and storage. Computer networks have extended the reach of computing to connect businesses across the supply chain and, in many instances, directly to the consumer. With the growth of the Internet, the computer has come to play an even greater role in commerce.

Computing has also become a larger and more intimate part of daily life for many people. Individuals now use computers to accomplish a wide array of tasks, from the complex to the mundane. (1-3) Whether it is used for communicating by e-mail and instant messaging, paying bills and managing personal finances, or the pursuit of hobbies and entertainment, the computer has become an essential tool. Indeed, the variety of tasks performed with computers today would have been difficult to foresee as little as two decades ago.

With all this progress has come a greater degree of reliance on computers and their connectivity to networks, and this reliance has bred high expectations for the availability and performance of computing and networking services. This expectation is not unlike that seen in other areas of technology to which modern society has grown accustomed; for example, the dependence on a ready availability of affordably priced electricity. Long ago a curiosity and a luxury, over the last century we have seen electricity grow beyond a modern everyday convenience to become a necessity in the lives of most people.

The prominence of computers in society and our growing reliance on them raises an interesting question: Is computing the next utility? The answer to this question has broad implications for the future of computing. Already, the idea of utility computing has begun to influence the development of computer technology in such areas as the auto-provisioning of computing resources and resource sharing across a computing grid. (4-6) Its potential role in the evolution of business models for computing services is of equal importance, and that role is addressed in this paper.

Common characteristics of utilities

In many parts of the world, although by no means everywhere, services such as water, power, heat, light, common carrier transportation (airlines, buses, and railroads), and telephone access are typically provided by a public utility. What makes any particular service a utility is shaped by a combination of requirements (see Table 1), most notably: users consider it a necessity; high reliability of service is critical; case of use is a significant factor; the full utilization of capacity is limited; services are scalable (leading to economics of scale); and exclusive rights are granted for providing service in a given area.

Necessity. Users depend on utility services to fulfill their day-to-day needs. Doing without service is an unwelcome option for them. Of course, seldom do utility services start out as essential. Its takes time for distribution networks to spread and costs to decline. It also may take time for users to adapt to the service. Once a service docs take hold, it may grow in importance as users discover new ways to use it to their benefit. How crucial a service becomes may ultimately depend on the circumstances of the individual user. But once users do come to depend on a service, it can become a transparent part of their everyday reality.

Reliability. The service provided by a utility must be readily available when and where the user needs it. A temporary of intermittent loss of service may cause more than a trivial inconvenience to the user; a prolonged loss of service may cause severe hardship. Because a failure in service has undesirable consequences, utilities must operate with an exceptionally high degree of reliability.

Providing continuous service in the face of various contingencies is a huge technological challenge that utilities face. Because some kinds of services may not be easily or cheaply inventoried, if at all, redundancy must be built into production capacity to make up for the inevitable equipment failure. Furthermore, because utilities provide on demand services, they must deploy transparent failover mechanisms and standby services to ensure continuous availability to the user. If one area of a service grid fails, the system must be able to compensate and respond instantaneously to the shortfall, thereby preventing the disruption of the service.

Necessity drives user expectations of utility services beyond what may be typical in other industries. Whether or not these expectations are realistic, utilities must do their best to buffer users from the predictable problems that could cause a discontinuity in service.

Usability. No matter how technologically complex they may be on the production end, utility services are characteristically simple at the point of use. Users have what could be called a "plug-and-play" mentality. This is not to say that devices connected to a service are unsophisticated, but the utility service itself tends to exist only in the background. Users may become mindful of a utility only in those rare instances when the service fails to meet their expectations. This may explain why the public perception of a utility is not always positive.

One ingredient in making a service simple at the user interface is a high level of technical standardization. Devices that add user functionality to the service must conform to the specifications of the network. Plug compatibility, independent of the vendor, is a common feature of utility services. Even so, technical standardization can be extremely difficult to achieve. In marketplaces where proprietary innovation is strong, the incentive for competitors to agree on standards is weak. Although a lack of standardization is costly and inconvenient, premature consensus on a standard may forestall significant innovation that can be of benefit to users.

To the extent that incompatible standards take hold, in some cases the consequences can endure for long periods, as fixed investments in infrastructure grow. Just how long this condition can last is illustrated by the case of the difference in voltage standards around the world. In such situations, technologies that enable the conversion between standards become a regular and cumbersome aspect of the user experience.

Utilization rates. Utilities are driven by a need to carefully manage utilization rates. User demand for utility services can fluctuate widely over time and across the service region. Because sufficient production capacity must be installed to handle periods of peak demand, overall utilization rates are typically well below full capacity.

In addition to fluctuations in usage, there may be discrete incidents of an exceptional nature when demand spikes sharply upward. Such spikes can occur when large numbers of users suddenly want to use the service simultaneously. Other spikes may occur when users fear a shortage in supply and begin hoarding, to the extent that it is possible.

Underutilization in off-peak periods provides a strong economic rationale for service providers to shift user demand from peak to off-peak periods. By pricing services according to actual metered usage and by providing off-peak price discounts, fluctuations in user demand can be smoothed out over the cycle. How a service is billed may also create incentives for users to limit their usage.

Scalability. Utilities are commodity businesses. Therefore, utility services can exhibit significant economies of scale that favor larger producers over smaller ones. As production capacity rises, the unit cost of production falls. There may be other size-related benefits as well. It might be expected that as the demand for a service increases beyond some threshold, the quality of service may decline as users begin to compete with each other. However, with some types of utilities, service can become more and more useful as the number of users of increases.

Service exclusivity. The economies of scale in a utility can benefit from a monopolistic provision of services. When this is the case, the government may step in to grant an exclusive franchise in a geographic region. Government regulation of the service and how it is priced typically accompanies such a sanction. Cost-based pricing is a common formula. With the benefits of an exclusive franchise comes the obligation to serve any and all users regardless of how profitable it may be for the utility.

Some of the common characteristics of a utility derive from its relationship with its customers. Other characteristics are derived from technological and business aspects of how the service is produced and distributed. The preceding list of characteristics, while important, is not meant to exclude other possible factors that may be relevant to particular types of utility.

Each of the characteristics described here mayor may not play an equal role in shaping any particular type of utility service. Table 1 provides an evaluation in the most general terms of the potential relevance of each factor for public utility services, including water, electricity, and common carrier (or public) transportation. In addition, the comparison is extended to examine a few businesses that have some characteristics in common with public utilities, namely radio and television broadcasting and Internet access services.

The utility business model