Economic benefits of the Cloud

Everyone says it is raining benefits because of the cloud.

If I can take you back to the mainframe era, Thomas J Watson, the CEO and Chairman of IBM, who transformed the company into a global powerhouse of computing is said to have said in 1943 –

What are these benefits and how are they caused? What creates value?

“I think there is a world market for about five computers”

Watson of course said this at a time when mainframes were the norm; costs were prohibitive and probably only governments and very large corporate bodies could hope to operate those mainframes.

The minis and the PCs changed all of that. We suddenly saw computing become a commodity. Anyone could afford a computer.

The Internet changed everything all over again. Although we are going to an era where we are again centralizing resources in gigantic data centers in a few locations, the Internet is making it possible to bring us a slice of that computing power at costs that are truly very small. See the graphic below that shows the costs of digital storage –

Even as late as in the year 2000, it would have cost you $7 to purchase 1 Gb of storage. Today this is under 6 cents. Therefore it has become easy for companies to set up data centers that have storage capacities running into thousands of terabytes. Cheap bandwidth on the Internet means that the costs of connecting to such a data center are also very low.

But still, why move to a data center? Consider the following

Cost of power – electricity cost represents about 15% to 20% of the total cost of running a server farm. Large datacenters are far more efficient in using power as compared to small individual set ups. Besides, these datacenters are being set up in locations where power is cheap and cooling requirements are lesser. You would never be able to get the pricing that a large datacenter is able to negotiate with the utility company.

Personnel costs – the economy of scale is obvious. Automated tools make it possible for fewer administrators to manage much larger numbers of servers. This lowers the costs of manpower substantially. Your hiring needs now become only that manpower that you specifically need to run your applications.

Infrastructure costs – Air-conditioning, fire proofing, backup, physical security – all of these tasks are handed over to the cloud services vendor. Once again, there are huge economies of scale.

There are many other benefits as well.

It has been estimated that about 75% of your IT costs are tied up with maintenance of older systems and various upgrades. Much of this cost is done away with and shifts to the cloud service provider who in any case is able to bring these down considerably due to economies of scale.

Typically, in many businesses, the ratio of revenue to IT expenditure can be increased several times over by shifting to cloud computing.

So how much does a typical cloud service cost? The table below (from the Google App Engine web site) will give you an idea.

One frontend instance – that is the creation of a virtual server that hosts your website – costs you $0.04 per hour. At peak hours you can increase to a 100 such and at lean periods being them down to just a few.

Can you ever match this capability and flexibility at these costs?

Post Comment