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Economics of Cloud Computing

Asoke K Talukder, Lawrence Zimmerman and Prahalad H.A are authors of the chapter on Economy in the Cloud in the book Cloud Computing: Principles, Systems and Applications. The following article is based upon their chapter in this book.

Cloud economics as presented in this section refers to the economic forces, business drivers, and structural issues affecting the costs and benefits of adopting cloud technologies.

Economic Context

Like energy, computing has become an essential component of any economy. Historically, the size of an economy was directly related to the energy it consumed. Likewise, a person’s professional growth, the growth of an organization, or the growth of a country as a whole can directly be related to the computing power they use. Rising energy costs, combined with a growing global awareness of the potential impact of climate change due to carbon emissions puts a renewed focus on energy usage and its associated carbon footprint. The challenge today is to increase computing power consumption with lower energy consumption. As this chapter is being written, every enterprise in the world is facing a global economic recession that has profoundly affected all developed countries as well as those developing countries that produce products sold in those markets. Uncertain times also bring opportunities – but taking advantage of strategic opportunities typically must now be done quickly without additional capital funds or additional corporate resources.

For information technology (IT) managers, energy cost management is not a small issue. In addition, the maintenance of legacy enterprise data centers absorb the majority of IT budgets and IT managers are looking for ways to create increased capacity and flexibility within their current computing facility and hardware footprint thereby lowering costs and increasing their return on assets (ROA). Because capacity planning for traditional enterprise data centers must accommodate the company‘s peak load periods, there is typically very low server utilization during non-peak periods which, depending on the industry, may be most of the year, The last few years have seen a trend in data center management towards server virtualization which allows faster deployment of specialized server configurations and towards higher server density without increasing the size of the data center or its staff overhead or even higher energy consumption. However these alternatives still require significant investments and long-term technology commitments and there has been increasing attention paid to alternatives that provide the pay-as-you-go options, unlimited scalability, quick deployment, and the minimal maintenance requirements. Cloud computing is a computing paradigm that promises to meet all these requirements.

Economic Benefits

Occasionally used to refer to the economics of cloud computing, the term “Cloudonomics” was coined by Joe Weinman in a seminal article entitled The 10 Laws of Cloudonomics. While far from being a comprehensive or exhaustive list of economic factors, his “10 Laws” serve as a useful starting point in our discussion. He examined the strategic advantages provided by public utility cloud services over private clouds and traditional data centers. He posits that public utility clouds are fundamentally different than traditional data center environments and private clouds. For individual enterprises, cloud services provide benefits that broadly fall into the categories of lowering overall costs for equivalent services (you pay only for what you use), increased strategic flexibility to meet market opportunities without having to forecast and maintain on-site capacity, and access to the advantages of cloud provider’s massive capacity: instant scalability, parallel processing capability which reduces task processing time and response latency, system redundancy which improves reliability, and better capability to repel botnet attacks. Further, public cloud vendors can achieve unparalleled efficiencies compared to data centers and private clouds because they are able to scale their capacity to address the aggregated demand of many enterprises, each having different peak demand periods. This allows for much higher server utilization rates, lower unit costs, and easier capacity planning netting a much higher return on assets than is possible for individual enterprises. Finally, because the location of the public cloud vendor’s facilities are not tied to the parochial interests of the individual clients, they are able to locate, scale, and manage their operations to take optimum advantage of reduced energy costs, skilled labor pools, bandwidth, or inexpensive real estate.

These are not the only benefits that have been identified. Matzke [6] suggests that the levels of required skills or specialized expertise along with the required economies of scale drive the optimum choice for resourcing IT initiatives. For him, the availability of scalable skills combined with other economies of scale are among the compelling benefits of cloud computing. This is especially true for enterprises that are located in labor markets that have very few or only very expensive IT staff resources available with the requisite skills.

Economic Costs

The costs associated with cloud computing facing early adopters include the potential costs of service disruptions; data security concerns; potential regulatory compliance issues arising out of sensitive data being transferred, processed or stored beyond defined borders; limitations in the variety and capabilities of the development and deployment platforms currently available; difficulties in moving proprietary data and software from one cloud services provider to another; integration of cloud services with legacy systems; cost and availability of programming skills needed to modify legacy application to function in the cloud environment; legacy software CPU-based licensing costs increasing when moved to a cloud platform, etc.

Company Size and the Economic Costs and Benefits of Cloud Computing

The economic costs or benefits of implementing cloud services vary depending upon the size of the enterprise and its existing IT resources/overheads including legacy data center infrastructure, computer hardware, legacy software, maturity of internal processes, IT staffing and technical skill base. These determine the strategic costs and benefits that accrue to individuals and corporations depending upon their relative size.

In the past, large corporations have had an advantage over small corporations in their access to capital and their ability to leverage their existing human, software, and hardware resources to support new marketing and strategic initiatives. However, since the advent of cloud computing, the barriers to entry for a particular market or market segment for a startup company have been dramatically reduced and cloud computing may have tipped the balance of strategic advantage away from the large established corporations towards much more nimble small or startup companies. A small, dedicated, and talented team of individuals can now pool their individual talents to address a perceived market need without an immediate need for a venture capital funds to provide the necessary IT infrastructure. There are a number of cloud providers who provide software development environments that include the requisite software development tools, code repositories, test environments, and access to a highly scalable production environment on pay-as-you-go basis.

Also contributing to this trend is the open-source movement. While licensing issues, support, and feature considerations may dissuade larger enterprises from using open source software in the development and deployment of their proprietary products, the availability of open source software in nearly every software category has been a boon to SMEs, the self-employed, and start-ups.

As these small companies grow into midsize and large companies they face changing cost equations that modify the relative costs and benefits of cloud computing. For instance, at certain data traffic volumes the marginal costs of operating on a cloud provider’s infrastructure may become more expensive than providing the necessary IT infrastructure in-house. At that point, there may be advantages of a mixed-use strategy in which some of the applications and services are brought in-house and others continue to be hosted in the cloud. The following tables will identify the differences that SMEs and large enterprises face in both the benefits and costs of cloud services.

The Economics of Green Clouds

The development of green data centers and green clouds is shaped by two important factors. The first is a global awareness of the devastating potential of climate change due to human activity primarily through carbon emissions. The second is the rising costs of energy. These two factors have focused IT infrastructure planning and decision-making on energy cost reduction, dynamic resource allocation strategies and have moved green issues from the category of nice-to-do to strategically important for all midsize and large corporations.

Public cloud providers locate their data centers where bandwidth, cheap energy, abundant water for cooling, and proximity to markets are optimal. Google and other cloud providers have focused on creative approaches to efficient resource usage including not only electricity usage but also water recycling and equipment recycling upon disposal. Through purchasing servers and other equipment designed to minimize energy usage and in the modular design and management of their data centers, these cloud providers minimize the non-computing energy overhead and maximize their utilization rates through the dynamic allocation of computing resources. This combination of lower energy overhead amortized over a much higher server utilization rate allows cloud suppliers to provide computing services far more efficiently with a much smaller energy and carbon footprint.

Because of the scale of operations of large cloud providers, they are able to achieve efficiency rates and server utilization rates that are unachievable in even large corporate data center operations. Thus cloud computing holds the promise of not only providing attractive cost savings at the enterprise level but also may contribute to the larger societal objectives of energy efficiency and environmental protection and sustainable development.