The Economics of the Cloud: Dissecting a Must-Read White Paper

A new white paper sponsored by Microsoft may be a watershed event in the debate on cloud economics, says CIO.com's Bernard Golden. Its conclusions regarding private cloud costs will surprise some.

By Bernard Golden
Thu, November 11, 2010

CIO — If you want to understand the key driver of the cloud computing revolution, you owe it to yourself to read Microsoft's (MSFT) new white paper "The Economics of the Cloud." In it, authors Rolf Harms and Michael Yamartino lay out an analysis of the economics that underlie cloud computing, and demonstrate in a convincing fashion why the shift to this new technology platform is inevitable. A copy of the paper is available as a download from the blog posting by the authors, located here.

After a brief introduction, the authors lay out a central thesis: despite initial concerns about shortcomings in new technology offerings, "historically, underlying economics have a much stronger impact on the direction and speed of disruptions, as technological challenges are resolved or overcome through the rapid innovation we've grown accustomed to."

To quote another sage on the same subject, "It's the economy, stupid."

The authors note that this pattern of adoption despite technical concerns is nothing new in the tech industry, citing client/server and virtualization as examples. Their point is that economic advantage ultimately overrides initial reservations, resulting in the spread of the technology.

I would go even further than that. I would say that, given significant economic advantage, organizations will adopt technologies despite their manifest and ongoing shortcomings. If one looks at state of personal computers today, it's scarcely believable that we use a technology so fraught with fragility, security holes, high administrative and maintenance costs, and constant need to upgrade. We put up with those things because of the tremendous benefits we receive by using personal computers, among them easy digital communication, highly modifiable digital documents that facilitate incremental improvement and what-if scenario exploration, scientific problem solving, data analysis, and more.

The question then becomes not are there problems associated with cloud computing? There are, without doubt. Beyond the obvious ones commonly discussed — like security, SLA levels, integration complexity, others like software licensing, bandwidth availability, need for new application architecture design pattern learning present themselves as well.

Instead the question becomes, does cloud computing offer enough economic benefits to cause us to mitigate or live with those shortcoming, a la personal computers. To this question, the authors respond with an unqualified yes.

The basis for the economic advantage is the economy of scale available to cloud computing data centers. The paper identifies three areas of scale advantage:

1. Supply-side savings: Cloud data centers have lower costs per server, based upon purchasing power.
2. Demand-side aggregation: By supporting a mix of tenants, cloud providers are able to achieve higher server utilization rates than is possible for single-tenant data centers (even those for large companies with different departments, business units, or subsidiaries sharing the data center).
3. Multi-tenancy efficiency: Hosting multiple tenants spreads administrative costs and reduces cost per data center user.

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