Economics of cloud computing for users
Cloud service provider economics
Because the cloud user no longer needs to invest in capital expenditures, from a cloud service provider's perspective, long-term capital expenditure (CapEx) as well as recurring operational expenditure (OpEx) costs are unavoidable. An important challenge for cloud service providers is to satisfy the demands of their clients while achieving high average utilization in order to make a profit, which depends on their ability to build datacenters with high efficiency and reliability at manageable costs. Cloud service providers amortize their costs over a large number of users.
Cloud service providers build large and reliable datacenters in order to attract a large number of users and improve their profitability. Just like other utility providers, cloud service providers can then procure and maintain hardware and software at significant savings per unit.
Economies of scale
Cloud service providers organize their infrastructure into large datacenters, which typically leverage three main areas:
- Supply-side savings: Large-scale datacenters lower costs per server.
- Demand-side aggregation: Aggregating demand for computing allows server utilization rates to increase.
- Multitenancy efficiency: When changing to a multitenant application model, increasing the number of tenants (i.e., customers or users) lowers the application management and server cost per tenant.
Cloud service providers undertake the difficult task of building and maintaining datacenters for users. For this model to be feasible, cloud service providers will have to leverage economies of scale and bring in many users. Providers benefit from economies of scale in the following areas:
- Cost of power: Electricity is rapidly becoming the largest element of total cost of ownership (TCO) in a datacenter, contributing to approximately 15% to 20% of total costs. Large cloud service providers can place their datacenters in locations with lower cost of power and sign bulk purchase agreements with electric providers to reduce electric costs significantly.
- Infrastructure labor costs: Cloud computing enables repetitive management tasks to be automated. In addition, in larger facilities, a single system administrator can service thousands of servers with the use of advanced management software.
- Buying power: Cloud service providers can purchase equipment in bulk from manufacturers, which can lead to major discounts over smaller buyers. In addition, cloud providers standardize their servers and equipment, which helps in lowering purchase and support costs compared to smaller IT departments. Technologies in datacenters and their design considerations are covered in a later module.