Economics of Cloud Computing

This section will look at the consumption-based model, one of the two economic characteristics of cloud computing. The second economic characteristic that cloud computing is based on is the cost-expenditure model of operational expenditure.

Consumption Model

In a nutshell, a consumption model means paying only for the time you use the resource. This can be likened to leasing/renting something instead of purchasing and owning the asset outright.

Some resources, such as virtual machines, can be stopped and started to reduce costs, so you only pay while running them. This is one of the key business benefits of the cloud computing cost model over a traditional computing cost model.

Now take a closer look at the cost-expenditure models.

Defining the Expenditure Models

It is essential to know the finance terms CapEx and OpEx. The details are as follows:

• CapEx: This is the “upfront commitment” of a large amount of money to purchase assets, such as investment in data center facilities, network circuit implementation, physical hardware, or software, as a “one-off payment” that you then own for the lifespan of those assets. You can liken this to the model of purchasing a vehicle or a mobile phone handset outright with a sum of money. You own it until it needs replacing, so you have to find another lump sum of money to reinvest to purchase another one in a few years.
• OpEx: Essentially, a pay-as-you-go model for consuming assets and resources is the ongoing running costs, which require a recurring payment when the asset or resource is required and in use to deliver services or functionality to a business. This could include staffing costs, data center facility management costs, power, and software that is not purchased outright but leased on a subscription basis.

There is no upfront commitment of money to buy assets. Every month, you pay only for the amount you use during a certain period. You can liken this to the model of renting a vehicle or mobile phone handset and paying every month. You never own the asset but use it for as long as you need. You may swap it, upgrade it, and downgrade it as you wish within the terms.

Figure 2.7 aims to represent this:

Figure 2.7 – Cost expenditure models

The value of cloud computing to a business is not so much the technology but the economic model it provides. The utilization of the cost model is often the value driver, with the technology being secondary.

You have learned about the cost expenditure models for a business that apply to cloud computing and traditional computing models. It is time to look at how those expenditure models are used and the benefits and value of cloud computing’s cost model.

Applying Cost Expenditure Models to Cloud Computing

In the traditional computing model (pre-cloud platforms), hardware resources and software were purchased upfront with a one-off lump sum. These business assets would be seen as depreciating assets; this is the CapEx model.

In contrast to the public cloud computing model, resources provided by the cloud platform are shared with others. This means there has been “no CapEx” to provision hardware, so you can start using these resources on demand. These resources are treated as day-to-day “OpEx.”

The exception is reserved instance resources, where you can commit to a usage term of one to three years, paying upfront (or monthly) on a CapEx basis to reserve predicted resource usage. This is more cost-effective over a one- to three-year period than paying on the pay-as-you-go consumption model.

In the case of the private cloud computing model, cloud computing technologies are hosted on dedicated, single-tenant hardware resources. Typically, these technologies are self-hosted on hardware in a facility (colocation) but may also be hosted with a third-party hosting provider. In this model, there is an element of CapEx and OpEx. The most significant portion is CapEx for purchasing hardware and assets, with usage (and often licensing and software) as OpEx.

The hybrid cloud approach will give the greatest flexibility in the expenditure model. This approach will allow you to decide the resources and respective expenditure models that they utilize to fit the business’s needs best (Figure 2.8):

Figure 2.8 – Application of cost expenditure models

The consumption cost model of cloud computing ensures not committing large amounts of capital expenditure on depreciating assets. Instead, by keeping that money within the business to use for day-to-day expenses, paying for what you need when you need it, and only for as long as you need it, you can keep your costs much closer to actual demand rather than over-committing to costs for a predicted demand. When resource demand exceeds predicted demand, the nature of the cloud computing model will ensure you have resources that can be scaled in and out to meet that demand.

The economics of cloud computing were covered in this section. You looked at the consumption model and how the cost expenditure models are applied, in addition to the benefits and value of the OpEx model of cloud computing. This concludes this chapter.