cloud economics

August 9, 2010

Based on a discussion with some friends I decided to do a very simple model pitting Amazon Web Services (AWS) against colocation in commercial space with owned gear.  This model makes a few simplifying assumptions, including the fact that managing AWS is on the same order of magnitude of effort as managing your own gear. As someone put it:

You’d be surprised how much time and effort i’ve seen expended project-managing one’s cloud/hosting provider – it is not that different from the effort required for cooking in-house automation and deployment. It’s not like people are physically installing the OS and app stack off CD-ROM anymore, I’d imagine whether you’re automating AMIs/VMDKs or PXE it’s a similar effort.
The results were not surprising to anyone familiar with the term ‘duty cycle.’ Think of it as taking a taxi vs. buying a car to make a trip between San Francisco and Palo Alto. If you only make the trip once a quarter, it is cheaper to take a taxi. If you make the trip every day, then you are better off buying a car. The difference is the duty cycle. If you are running infrastructure with a duty cycle of 100%, it may make sense to run in-house. The model that I used for the evaluation is here.
Note that the pricing is skewed to the very high end for colocation, so the assumptions there are conservative. Levers are in yellow. Comments are welcomed.
I’d like to thank Adam, Dave and Randy for helping me make the model better.
Edit: Some folks are asking for graphs. I thought about adding sensitivity analysis to the model but that would be missing the point. This model presents an analytical framework which you are free to copy and then sharpen up with your own business model and cost structure. Running sensitivity analysis on that will be much more interesting. Added an NPV calculation for some people who asked for it.