How the Move to Software-Defined Infrastructure and Networks, the New IP, Is Changing the Economy

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1 How the Move to Software-Defined Infrastructure and Networks, the New IP, Is Changing the Economy Robert B Cohen, PhD Senior Fellow, Economic Strategy Institute November 1, 2016 Cloud Expo, Santa Clara, CA

2 The Impact of Innovation-centric and Software-enabled Infrastructure To add between $1.2 trillion and $1.8 trillion to US GDP over the 2015 to 2025 period. The largest contribution to GDP will occur between 2020 to 2025, when we estimate that the adoption of the New IP is likely to add between $907 billion and $1.4 trillion to US GDP. This forecast adds to expected US GDP growth over the 2015 to 2025 of $5.2 trillion. Due to the deployment of softwareenabled infrastructure cloud services and network virtualization -- GDP growth expands by 8.4% to 12.7%. 11/1/2016 2

3 How Should We Think About Recent Developments in Cloud Computing, Cloud Services Examining cloud services from an enterprise perspective, we can see that firms have moved from: 1. Virtualization of computing and storage 2. Software defined data centers 3. Expanding software-defined infrastructure throughout the enterprise (Some call this the New IP, which might indicate a new Internet Platform). 4. Adding network virtualization to software-defined infrastructure platforms 11/1/2016 3

4 Are there Parallels to this Story in Recent Economic History? In the late 1990s, US GDP unexpectedly increased sharply Economists Oliner and Sichel found increases in the use of IT accounted for 2/3 of the 1% gain in productivity and growth. The relationship between IT improvements and productivity is unresolved. Some economists concluded in looking at the late 1990s that technical improvements (shorter technology cycles) as well as greater production of semiconductors contributed to the gains; when prices fell in the early 2000s, these conclusions were questioned. If firms and vendors can adopt software innovations rapidly, cloud services may have a similar economic effect. This may result from technology innovations as well as expanding how applications are used within the firm, i.e., network effects. Source: Stephen D. Oliner and Daniel E. Sichel, The Resurgence of Growth in the 11/1/2016 Late 1990s: Is Information Technology the Story, Federal Reserve Bank of San 4 Francisco, May

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6 Source: David M. Byrne, Stephen D. Oliner and Daniel E. Sichel, How Fast are Semiconductor Prices Falling? NBER Working Paper No /1/2016 Issued in April

7 Stages of the Evolution of the New IP: Economic Impacts of Software and Architectural Innovations Evolutionary Stage Timing Characteristics Quantifiable Benefits Hardware-based virtualized cloud computing -- example Software Defined Data Center (SDDC) New IP Stage 1. Softwaredefined, Innovation-centric infrastructure, often called the New IP. Moves Softwaredefined into the Enterprise. New IP Stage 2. Extending applications throughout the enterprise ecosystem via virtualized networking. New IP Stage 3. Adding the ability to extract information out of the network and automate many of the functions in the ecosystem to to to to 2024 Virtualized server racks, largely centralized in data centers. Key hardware functions are replaced by software (load balancing, firewalls). Firms can more easily run applications across their full computing and storage ecosystem. Applications are written on top of software defined networks and controllers. Cross-domain orchestration makes this possible. Virtualized networks operate through WAN orchestration. Because of bidirectional programmatic interfaces, firms focus development efforts on networks. Traffic control operates across networks. Firms automate many applications. This increases network utilization. Cost savings as high as 50% over 3- years. Roughly 67% increase in data exchange (a substitute for workloads). Greater benefits due to ease of running applications across the enterprise. Cost savings of 80% over 3 or 4 years. Workload grows by 91% in 3 years and 136% in 4 years. Improves the use of applications and number of workloads per day. Cost savings of +/-80% to 100% over 3 to 4 years. Workload growth in the range of 30% to 40% per year. Efficiency growth increases. A breakthrough -- promotes automation of the enterprise ecosystem. Cost savings might be in the range of 100% to 120% over 3 to 4 years. Workload expansion 40% to 50% per year. 11/1/2016 7

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12 Cloud Service Providers' and Telcos' Spending on All-Digital, Software-Defined Infrastructure, in Billions CSPsTotal Spending CSPs Total Spending Telco Total Spending Telco Total spending HI LO 11/1/

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