Cloud Computing: Hype or Revolution? It’s all about time and fixed costs, not operating margin

A colleague recently emailed an argument that higher level computing providers like Heroku are doomed due to the “Fundamental Law of Another Mouth to Feed” where the margin requirements of the services these providers are reselling means they will eventually lose to someone without that margin in their supply chain.  As with any asymptotic complexity argument, this is sound theoretical thinking, except it ignores the significance of constants in the equation.  Following is a slightly cleaned up version of my response.