The Rise of Cloud Computing: Minding Your Ps, Qs, and Ks

Working Paper: NBER ID: w25188

Authors: David Byrne; Carol Corrado; Daniel E. Sichel

Abstract: Cloud computing—computing done on an off-site network of resources accessed through the Internet—is revolutionizing how computing services are used. However, because cloud is so new and it largely is an intermediate input to other industries, it is difficult to track in the U.S. statistical system. Moreover, there is a paucity of systematic information on the prices of cloud services. To begin filling this gap, this paper does three things. First, we define the different segments of cloud computing and document its explosive expansion. Second, we develop new hedonic prices indexes for cloud services based on quarterly data for compute, database, and storage services offered by Amazon Web Services (AWS) from 2009 to 2016. These indexes fall rapidly over the sample period, with quickening (and double digit) rates of decline for all three products starting at the beginning of 2014. Finally, we highlight the puzzle of why investment in IT equipment in the NIPAs has been so weak while capital expenditures have exploded for IT equipment associated with cloud infrastructure. We suggest that cloud service providers are undertaking large amounts of own-account investment in IT equipment and that some of this investment may not be captured in GDP.

Keywords: cloud computing; price indexes; capital investment; IT equipment

JEL Codes: E01; E22; E31; L16; O3; O4

Causal Claims

Cause	Effect
cloud service prices decline (D49)	increased investment in IT infrastructure (H54)
entry of Microsoft and Google into cloud market (L86)	AWS price reductions (D49)
own-account investments by cloud service providers (E22)	discrepancies in reported IT investment in GDP (E20)
shift to cloud computing (L86)	weakening demand for traditional IT equipment (L63)
higher utilization rates of cloud services (L86)	observed investment trends (F21)