This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
This article is an extract from our Annual Review 2015.
To fully appreciate why the 'cloud' is the future of computing and anticipate its legal impact, one can look at a law of economics coined in 1890 and learn what happened around the same time just 200 metres from Olswang's London office, says Clive Gringras.
In 1890, Alfred Marshall finished a decade's work. His eight-volume Principles of Economics was finally ready. Those, like Keynes, who read the fourth volume were introduced, for the first time, to the concept of 'economies of scale'.
Marshall's analysis, then novel, was that in some trades, "If [a man] can double his production, and sell at anything like his old rate, he will have more than doubled his profits. This will raise his credit with bankers and other shrewd lenders; and will enable him to increase his business further, and to attain yet further economies, and yet higher profits; and this again will increase his business and so on. It seems at first that no point is marked out at which he need stop."
In other words, there are some trades - some businesses - that are better when bigger. They deliver a better service than lots of smaller businesses. They can deliver the same or higher quality at a lower cost than smaller businesses.
At the same time as Marshall was at the University of Cambridge writing his economics treatise, Lord William Armstrong, the founder of Newcastle University, was "lounging idly about, watching an old water-mill", when it occurred to him how powerful the water would be if "concentrated in one column". Harnessing this power prompted Armstrong to build the world's first hydroelectric power station, which lit one lamp in the gallery of Cragside House in Northumberland. Word spread. Other houses and offices, where near flowing water, started to copy Armstrong's innovation. Each house or office would build their own energy collection system and install their own dynamo, draping wires throughout the house to the one or two lamps that their production could illuminate. It did not stop there, as we know. In 1882 Thomas Edison installed Europe's first public power station at 57 Holborn Viaduct in London. This lit over a thousand lights across homes and offices. Marshall's economies of scale were working their magic with electricity.
In a century we have moved from hundreds of individual homes generating their own power to having a collection of massive power stations each generating energy for consumption by billions of people. With electricity, bigger simply is better. It's easier to maintain, regulate and police one large station than thousands of little ones. Because the marginal costs decrease with the size of the plant, the costs to consumers can fall even as security and efficiency advances are made by its owner.
Powering the cloud
Cloud computing is now where electricity was in 1890. There are still homes and offices across the world that each protect and support their own data-storage device. Hundreds of millions of television set-top boxes and video recorders purr quietly in homes across the world - each hosting gigabytes of storage. The more sophisticated homes (the equivalent of Lord Armstrong's Cragside House) have network-attached storage drives - port forwarding through their owners' routers to allow access across the internet. There are also the Holborn Viaducts of this digital era trying to persuade these homes and offices to stop supporting their own storage and buy it, as they do with electricity, from a supplier. Amazon and Microsoft provide remote storage and processing power - 'cloud computing' - mainly to enterprises. Add Apple, and you have three of the largest suppliers of cloud computing to consumers, whereby music, video, photos and documents can all be stored remotely.
Microsoft's Irish data centre will have 415,000 square feet of servers. That's over five football pitches of data storage, yet it will need fewer than 100 people to support and run the whole operation. Its newly announced Iowa data centre is even larger. Count how many technicians work to support the in-house servers that operate your own IT. Forget jargon and technology - it's the unchallenged law of the economies of scale that will drive down the costs of Microsoft's Azure and Amazon's Elastic Compute Cloud (EC2) while driving up the relative costs of keeping one's own servers in the 'IT room'.
But just as Edison's power plant at Holborn Viaduct faced regulation from the Electricity Act of 1884, so regulators have their eyes on cloud computing. Then, it was about electricity cables passing through local authority borders; this time, it is about data passing out of a country's borders. The draft Data Protection Regulation is concerned with personal data passing outside of the EU's borders into regimes that do not provide adequate protection for that data. If one were to read the many articles about cloud computing, one might come away thinking that personal data is the only dataset sitting in the cloud. This is not true, and we are increasingly seeing cloud services powering all of our computing tasks and processing all the data that we currently have on-premise. Lawyers will need more than a good knowledge of data protection alone to advise on cloud deals.
Most businesses cannot function without computers, and as their computing power is moved to the cloud they will become more concerned with the service levels that their cloud providers deliver. Power cuts are a very rare occurrence, and users of cloud services are demanding similar 'rare occurrences' of downtime for their cloud computing services. Cloud providers that merely provide 'as is' uptime guarantees rather than the 'four nines' (99.99%) type of guarantees will find themselves sidelined for business-critical services. As with the electricity market, competition for cloud services is intense and providers will compete not only on price but also on service availability. Lawyers will need to understand how to negotiate these sorts of service-level agreements and be wise to providers' definitions of downtime that exclude certain times of the day or periods under a certain duration.
Portable data
The legal profession will also need to be ready for the free movement of data between cloud providers. Just as any appliance will work plugged in, regardless of the electricity supplier, and just as the debate between AC, DC and voltages is over, so customers of cloud services expect their data to be portable. The providers that will earn respect from customers are those that have the confidence to allow the customer's data to be exported during the life of the contract and after termination. And the data that the customer has access to should be not merely the data they uploaded but also the metadata that the cloud's servers also host.
Security is another area where customers have high expectations. Competition between cloud providers should drive up the levels of security being offered to cloud customers. Users of cloud services have to trust that a cloud provider is treating their data with high standards of care. Standards such as ISO/IEC 27001:2005 should become the norm, and customers will be insisting that these meet the physical, logical, process and management controls as a minimum.
It's the century-old law of economies of scale that will drive cloud computing deeper into our homes and offices.
Click here to view an electronic copy of our Annual Review 2015.
