Soybean Is A Commodity
by Ken Wood on Sep 23, 2011
While having dinner in Waltham, Massachusetts the other night with a table of smart people, the topic of commodities came up.
What is a commodity?
Soybean is a commodity. Steel is a commodity.
Why does everyone consider storage a commodity? I said, “…actually, capacity is a commodity, not storage.” Everyone’s eyes lit up. That’s true. CPU cycles are a commodity, but processors and servers are not. Networking bandwidth is a commodity, but network switches are not. Storage capacity is a commodity, but the storage equipment behind it is not.
So is there a distinction? My old colleague Michael Hay posted a blog on a similar subject last year, and my new colleague, Shmuel Shottan from BlueArc, also blogged about this subject on Nov. 8th 2010. So I grabbed this definition from Wikipedia:
A commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market. A commodity has full or partial fungibility; that is, the market treats it as equivalent or nearly so no matter who produces it. Examples are petroleum and copper. The price of copper is universal, and fluctuates daily based on global supply and demand. Stereo systems, on the other hand, have many aspects of product differentiation, such as the brand, the user interface, the perceived quality etc. And, the more valuable a stereo is perceived to be, the more it will cost.
The case of “stereo systems” is a very good example of a misunderstood situation in our industry today—product differentiation matters. While the output of these products may be perceived as a commodity–such as CPU cycles, capacity and bandwidth—the quality of the product producing these “outputs” is worth it.
So here’s my distinction between CPU cycles and CPUs/servers, or storage capacity and storage systems, or bandwidth and networking: Cycles can be bought and sold at varying prices based on several factors, such as time of day or week, based on current loads or some other seasonal impact (supply and demand) similar to electricity. Service providers can even compete on the cost per CPU-cycle-hour. I’ve even seen CPU-cycle-hours donated or given away as a promo or part of a grant. The same could be said for bandwidth or Internet access, but the equipment that creates these “goods” provide a distinguishable quality that is noticeable, and in most cases, sought after.
The difference is that you can buy and sell commodities by the bulk (there are extreme corner cases where some companies buy equipment at huge quantities, but this does not fit the mainstream model nor does it make the gear a commodity). Hence, you can buy CPU cycles by the hours or months. You can buy bandwidth by the gigabyte per month. You can buy capacity by the gigabyte per month. You can buy soybeans by the ton.
It is my opinion that there is a misunderstanding and confusion in the IT industry between “commodity goods” and “consumer products” when it comes to technology. I can’t pinpoint the exact origin of why or how these two concepts seem to have become synonyms for each other, especially in the IT industry, but there is a difference between commodity goods and consumer products. The technologies used and the blending of these technologies, be it the user interface, the way it is managed, its performance and/or reliability of a product, contributes to the overall perceived and measured quality of a product.
There is also the “secret-sauce factor”. The hybrid combination of commodity components with special, purpose built components to complement the overall invention of a product can elevate that product to something altogether different, a new standard. In fact, one could argue (wrongfully) that once a technology becomes a “standard” it is treated as a commodity. Of course we all know there is a difference between being an industry standard or following a standard, and setting the standard.
The other argument that can be made (wrongfully again), is that if a product is constructed with some measureable amount of commodity parts (resistors and capacitors are bought by the bulk), then the product itself must be a commodity. Of course, with many quality products, there is also a measureable amount of differentiated know-how blended together, plus the inclusion of secret-sauce to create a unique and desirable product. Only companies in the business of inventing innovative technology and products can provide the quality and reliability that customer’s desire.
So, while soybeans are a commodity, a fancy restaurant, a little sea salt, a culturally focused serving bowl and an exotic name can buy you Edamame for $15 bucks. For just a few ounces.