Cloud computing users can avoid capital expenditure (CapEx) on hardware, software, and services when they pay a provider only for what they use. Consumption is usually billed on a utility (resources consumed, like electricity) or subscription (time-based, like a newspaper) basis with little or no upfront cost.
Other benefits of this time sharing -style approach are low barriers to entry,shared infrastructure and costs, low management overhead, and immediate access to a broad range of applications. In general, users can terminate the contract at any time (thereby avoiding return on investment risk and uncertainty), and the services are often covered by service level agreements (SLAs) with financial penalties.
According to Nicholas Carr,the strategic importance of information technology is diminishing as it becomes standardized and less expensive. He argues that the cloud computing paradigm shift is similar to the displacement of electricity generators by electricity grids early in the 20th century.
Although companies might be able to save on upfront capital expenditures, they might not save much and might actually pay more for operating expenses. In situations where the capital expense would be relatively small, or where the organization has more flexibility in their capital budget than their operating budget, the cloud model might not make great fiscal sense. Other factors impacting the scale of any potential cost savings include the efficiency of a company’s data center as compared to the cloud vendor’s, the company’s existing operating costs, the level of adoption of cloud computing, and the type of functionality being hosted in the cloud.
Among the items that some cloud hosts charge for are instances (often with extra charges for high-memory or high-CPU instances); data transfer in and out; storage (measured by the GB-month); I/O requests; PUT requests and GET requests IP addresses and load balancing. In some cases, users can bid on instances, with pricing dependent on demand for available instances.
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July 18th, 2010 at 5:17 pm
Interesting discussion of cloud computing economics. I do not really agree with the statement that “Although companies might be able to save on upfront capital expenditures, they might not save much and might actually pay more for operating expenses.” The important cost point that is ignored in this analysis is the cost of having a person maintaining your physical servers. For a high avail. application this requires 24/7 labor – something that is quite expensive. Until an organization has dozens to 100 servers, having full time staff to babysit your infrastructure is cost prohibitive.
In fact, the cloud model makes the MOST sense when an organization has very small capital expenditure needs because the labor cost per server maintenance is so high. The other time that a cloud model makes a ton of sense is if an organization has high peak loads. Being able to turn on 20 additional instances for a day is much more cost effective vs. having to have 20 under-utilized servers waiting for something to do most of the time.
Large organizations with steady compute loads are the organizations that are least likely to benefit from cloud computing. I agree with your analysis for these organizations.
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