2.3 [related to the Economics in Practice on p. 227] One of the more recent innovations in computer technology is called “cloud computing.” With cloud computing, information and software are provided to computers on an “as-needed” basis, much like utilities are provided to homes and businesses. At the beginning of 2015, Amazon and Microsoft were ranked number 1 and 2 in terms of size for cloud services providers. In a statement advocating the advantages of large, public cloud providers like Amazon.com over smaller enterprise data centers, James Hamilton, a vice president at Amazon claimed that “server, networking and administration costs the average enterprise five to seven times what it costs a large provider.” What does Hamilton’s statement imply about the returns to scale in the cloud computing industry, and what does it indicate about the size of the companies that will most likely dominate this industry in the long run?

Source: James Urquhart, “James Hamilton on cloud economies of scale,” cnet.com, April 28, 2010.