The Actual Truth About the Economics of Cloud Computing

May 26th, 2011 by - 11,318 views

Don’t let the media fool you. Which of these actually make cloud computing financially compelling?

  1. Super cheap power, such as hydro-electric
  2. Shipping container datacenters
  3. Massive datacenters
  4. Blade servers
  5. Datacenters with super-efficient cooling
  6. VMware virtualization licenses
  7. Pay-as-you-go pricing
  8. Automation
  9. Shared platforms
  10. Commodity hardware

The answer is NOT “all of the above”! If you said “pay-as-you-go pricing, automation, shared platforms, and commodity hardware” then you win. In fact, these four concepts are so powerful that I believe that they will shrink the entire IT economy. IT shrinking? How could that be possible? Yes, I think that the $3.3 trillion dollar global IT economy could be cut in half. When I’ve made this declaration before I’ve been likened to the commissioner of the US Patent Office who was rumored to have said:

“Everything that can be invented has been invented.”

Charles H. Duell, Commissioner, U.S. patent office, 1899 (attributed)

In truth he didn’t say this.

But I’m still saying that I think we’re currently seeing the peak of complexity and cost in IT. IT is going to get easier and less expensive from this point forward. There. You have it in writing.

#1. Pay-as-you-go pricing

Pay-as-you-go pricing can reduce total IT costs by 90% or more in many cases. The tech industry always has huge claims like this so why is this one such an incredibly big deal? For example, Intel is always coming out with processors that are a zillion times faster. This is a big deal because we’re not talking about a single component getting much better, we’re talking about the whole IT budget. The whole IT economy. This most powerful force driving the economics of cloud computing really has two components, you “pay for only what you need” and you can “switch what you do pay for”.

Pay for what you need

Paying for only what you need means that you don’t need to over-provision. This part of cloud computing is analogous to the electrical power grid that “GoGrid” is named after. Businesses don’t need to generate their own power anymore.


The average IT department would never confess to how guilty they are of over-provisioning. I’ve been the CEO of colocation, dedicated hosting and cloud hosting companies. Each of these models provides an improvement in your ability to provision only the IT resources that you need. And because I have been exposed to thousands of installations in each of these business models, I have a unique perspective on the efficiencies of each model. Basically, the average colo customer “wastes” about 90% of their infrastructure, dedicated server customers do better but still “waste” about 70% of what they are paying for, and with our cloud platform we’re seeing “waste” as low as 10%.


With colocation you don’t need to have your own datacenter so you can generally control how much space and power you want to pay for. You still need to commit to 1 to 5 years’ worth of space and power so you almost certainly will have periods when you have too much space and power or not enough space and power. IT loads are never static.


You tend to alternate periods of too much which is wasteful, or too little which is potentially even more damaging to your business. The bigger problem with collocating your IT equipment is that you still need to buy the equipment. You don’t want to risk running out of capacity so you buy big. You estimate what you need at peak load, say the demand you hope to see during the holidays, and that is what you buy for and live with for several years.

We’ve studied the aggregate waste of our 1,000s of colo customers and estimate that 90% of their CPU power, 70% of their RAM and 50% of storage space is wasted. This means that somewhere around 70% of the electricity needed to power and cool this equipment is also wasted.

Dedicated Servers:

Dedicated servers give you much improved granularity in your purchasing and significantly shorter contracts but we still estimate that over 70% of the CPU power, 60% of the RAM and even more of the storage space is wasted, along with the corresponding use of electricity. Among other challenges, you still can’t scale your individual servers to re-size them as loads change without somebody getting out a screw-driver, so you tend to over-provision.

Cloud computing:

Cloud can be paid for by the hour. Because your infrastructure can scale up and down automatically, it is just like turning on and off the lights. Waste can be minimized. You can scale in two ways that aren’t as easy in the real, physical world, both horizontally by adding and deleting servers automatically, and also vertically, by enlarging and shrinking the servers themselves. Paying for servers by the hour even gives you the ability to de-provision servers at night and GoGrid has many customers that are doing this quite effectively. GoGrid servers are being turned on and off at a super high rate of speed. In fact, the number of “adds” per month at GoGrid is much higher than the number of servers that customers just leave running for the month.

Switch what you do pay for

Now here’s a concept that works… don’t agonize over your IT decisions. You aren’t as stuck with them as you have been in the past. It took many years for the client-server revolution to occur because embracing this architecture was an incredibly costly endeavor with a 10 year plus commitment. It took many years for that generation of computing to happen, but cloud is happening much more quickly. With the cloud, you don’t own anything so if you don’t like what you have you can dump it and switch. It is hard to put a percentage savings on this but isn’t freedom an incredibly powerful economic advantage that will give incredible flexibility to business?

In summary, Pay-as-you-go is number one this list for good reason. Pay-as-you-go is an “order of magnitude” force…a “90% cheaper” force…a “10,000% better” force on the economics of IT.

#2. Automation

Labor is the single biggest piece of the IT economy according to Gartner. Equipment isn’t even close. People make mistakes, they are super-expensive, and they just can’t do as good of a job running infrastructure as software that can run infrastructure for itself. That is the big change here… programmable infrastructure. “Dev Ops”.

While automation isn’t itself the single biggest economic factor in the cloud revolution, it is the key technological factor. The big change of the cloud generation is that now software controls infrastructure. In the old world software was developed by one group of people and then a completely different group operated the software. Now developers run the whole show. The datacenter has been automated and a whole bunch of labor, complexity and cause for error has been eliminated.

#3. Shared Platforms delivers a complex CRM solution to 97,700 customers using 3,000 servers, a ratio of 0.031 servers per customer. 1,500 of the 3,000 servers are turned off according to Mark Benioff at 0:52 into this speech:

0.03 servers per customer for a complex CRM service is incredible. In the “old world,” this would take at least 2 servers, a hot one plus one for disaster recovery / business continuity. Many businesses deploy a whole bunch more than 2 servers for a complex CRM installation. Zero-point-zero-three servers per customer is a 65 X improvement over the old days. Not 50% or 100% but 6,500%. But wait, there’s more, this isn’t just a savings in server hardware, think of how much more efficiently manages these 3,000 servers than 100,000 random companies could manage more than 200,000 servers themselves. Crazy. Keep in mind that labor is the single biggest piece of the $3.3 Trillion global IT economy.

There are lots of obvious and powerful reasons when shared platforms make clouds incredibly cost-effective to operate, including scale and an easy-to-operate homogeneous environment that fits all customers. Service providers have capabilities and tools and best practices that they can share amongst thousands of customers and do a much better job than any customer could possibly do individually. Shared platforms also let the service provider capitalize on the mis-matched peak load periods amongst the customers. For example, consumer services (yes, including porn) are popular in the evening while business services are popular during the day and number crunching can be done in the middle of the night.

#4. Commodity Hardware

The programmability of cloud infrastructure enables designing for failure. Things heal automatically so now you can use “throw away” components. No more paying ten times as much for an “enterprise” server that has 3 power supplies but does the same job. Did the hardware powering your Web server fail? No biggie. You should have at least three small ones running anyway instead of one big one, all load-balanced to automatically handle this failure while a replacement is spun up. The leading public cloud vendors and the largest Internet properties are achieving fantastic uptime using super-cheap hardware. No cloud based on “enterprise-grade” hardware from IBM or HP could possibly be price competitive.

The “Doesn’t Matter” list:

  1. Super cheap power, such as hydro-electric
  2. Shipping container datacenters
  3. Massive datacenters
  4. Blade servers
  5. Datacenters with super-efficient cooling
  6. VMware virtualization licenses

1. Super cheap power, such as hydro-electric

At GoGrid, power represents less than 5% of our cost of goods sold. We’re a nicely profitable company despite buying some of the most expensive power and cooling on the planet. Theoretically, we could knock a few points out of our COGS if we used a datacenter next to the Columbia River in Eastern Oregon. Great fishing there, too. But then we’d have new costs that we don’t have now such as the costs of managing people who are native to Eastern Oregon and paying people from Silicon Valley to travel to Eastern Oregon to manage those people and lots of networking costs to take traffic to and from there which increases latency and also the costs of fishing lures.

2. Shipping container datacenters

Maybe somebody else can tell me why these things have anything to do with cloud computing? They are not cheap, not even on a per server basis if you use them completely. And you can’t just park them anywhere. Any claims that these are relevant to cloud computing are likely good examples of “cloud washing”.

3. Massive datacenters

These are critical to Google, which has been rumored to own 2% of the World’s servers:


(image source: intac)

However, the efficiencies that this scale provides just aren’t relevant in today’s SaaS and IaaS markets yet. Margins are super high and businesses pay well for complex infrastructure. Super low-cost PaaS offerings aren’t yet seeing traction from power users. Nobody is giving away free complex infrastructure (yet) on an ad supported model.

4. Blade servers

These are incredibly expensive and always out of date. If you want to use the latest processors, don’t expect to find them on blades. And if you are using blades, you are likely tied into other hardware and software too, which also is quite expensive and inflexible. The leading public clouds don’t use blades and never will.

5. Datacenters with super-efficient cooling

Green is great. Cloud computing is incredibly green for the same reasons that the economics are powerful… a whole lot less infrastructure needs to be provisioned, in many cases 90% less or even 65 times less as is the case with But green datacenters really aren’t relevant to the economics of cloud computing at this time.

6. VMware virtualization licenses

VMware is expensive. Virtualization is free. Amazon is the runaway market leader for cloud infrastructure and they do not use VMware and I’d be surprised if they ever did. GoGrid uses open source XEN, and so do other leading public clouds. There is even a third open-source (free) virtualization alternative called “KVM” that has wild technical acclaim.


There is good reason why all businesses need a cloud computing strategy even though it is so new. Cloud computing doesn’t deliver a small improvement; cloud will reduce existing IT costs by a factor of 10 or more in many cases. Pay-as-you pricing is the number one economic force driving the cloud. Most importantly, cloud computing is making IT simpler, greener and more reliable in addition to far less expensive.

The following two tabs change content below.

John Keagy

CEO & Founder at GoGrid
John Keagy is CEO and Founder of GoGrid, a Global Leader in Cloud & Hybrid Infrastructure hosting. Keagy is an Internet infrastructure pioneer, having built and sold several successful Internet service providers since 1991. At ServePath, now known as GoGrid, Keagy drove the early growth of the dedicated server hosting market by introducing multiple firsts, including multiprocessor servers and hosted load balanced server networks. John Keagy's entrepreneurial skills and strategic vision have led ServePath and now GoGrid's rapid growth.

2 Responses to “The Actual Truth About the Economics of Cloud Computing”

  1. Madhusudan Challa says:

    Great blog !!! Thanks.

  2. raf says:

    thx . it was a great read

Leave a reply