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Posts Tagged ‘ROI

Is there hard ROI to use a cloud IaaS instead of a server in your garage/basement/on-premise datacenter? I think there increasingly is and justifying self-hosting is getting increasingly tough.

I would actually go as far as posit that you can now get a server in a public datacenter at price comparable to your electricity bill alone!

If you don’t believe me – let’s do a quick math.

Mark Kolich noticed in his blog that the server he had running at his home was consuming 220 W, which at the consumer electricity costs of 12-cents per kWh means:

0.220 kWh * 12 cents = 2.64 cents per hour

Almost 3 cents/hour for electricity alone not taking into account: labor, server hardware amortization, data-storage costs (replacing a failed disk), cooling costs, ISP costs, security costs (routers, firewalls, etc.), power backup costs (a UPS) and so on. Mark notes that he could have probably bought a newer more energy efficient server – but the required investment would not justify the savings.

The shocking part is that the recent price competition of cloud infrastructure (IaaS) and platform (PaaS) vendors took the current cloud servers costs to roughly the same order of costs. Here’s a quick survey of a few major cloud players:

  • Microsoft is rolling out their 5 cent/hour option (with additional further discounts if you pre-pay for reserved use – e.g. say you have a bunch of instances which you have running all the time and you are willing to pre-pay for the next few months).
  • Same thing with Amazon: minimal price (although for a slightly more limited version) is already in 2 cent for Linux / 3 cent for Windows instance area, with reserved/pre-paid option getting as low as 0.7 cents/Linux & 1.3 cents/Windows.
  • Rackspace pricing starts at 1.5 cents/hour for Linux, and 8 cents/hour for Windows.

My take on these numbers is that you need to have a really good reason to go into hosting when there is so much price competition in that space and the margins are going down so fast.

The only good reason I can think of is hosting being your competitive advantage in some way. For example, being a local hosting company in a country which legislation is making it hard to use foreign datacenters. Or offering some level of compliance which public hosters cannot provide. And as a matter of fact both of these differentiators are gradually going away with the vendors quickly getting all the possible certifications and compliance stamps you can think of, as well as opening datacenters around the globe.

Cloud is cheaper than your own hosting regardless on how you calculate the costs. Get used to it.

Dmitry

McKinsey published a report this week claiming that their research shows that for organizations with revenues above $500 million using external cloud computing resources are more expensive than using their own datacenters: $366 a month per unit for cloud compared with $150 a month for traditional datacenter.

I had received quite a few emails with links to articles on this report (e.g. this or this) so I decided to post my opinion in this blog as well.

First of all, you don’t have to work for McKinsey to do a simple exercise: go to Amazon’s web site, see their EC2 pricing, multiply their, say, Windows/SQL server price by 24 hours by 365 days and learn that your costs can get as high as $28K a year.

Does this mean cloud computing is overly expensive? The answer is: it depends.

First of all, as Joe rightly mentions here, even if Amazon’s price seems way too high, you might actually be spending a lot internally as well – you just don’t realize that because a lot of companies don’t calculate these costs.

Secondly, just the costs of running the computers (or VMs) and pretending you are doing a comprehensive cloud computing analysis is a somewhat flawed approach. Of course, when we simply talk about computers, and the amount of compute power you need is constant (so you don’t need elasticity and can provision in advance) then owning is probably cheaper.

However, this does not mean that consuming services is more expensive than deploying and maintaining corresponding software implementation. Deploying, say, a modern messaging system such as Exchange following all the hardware a design guidelines can cost a fortune even to a medium-size business, for a lot of companies their SAP or PeopleSoft implementations are huge expensive projects, and desktop costs are probably higher than anything else.

Cloud computing means a lot of different things to different people and when we see costs analysis reports like that we often generalize and start comparing apples to oranges. Depending on what exactly you are planning to consume from the internet and what would be the on-premise alternative can make your mileage vary a lot.

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The posts on this blog are provided “as is” with no warranties and confer no rights. The opinions expressed on this site are mine and mine alone, and do not necessarily represent those of my employer Jelastic or anyone else for that matter. All trademarks acknowledged.

© 2008-2012 Dmitry Sotnikov

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