Economics of Cloud Computing

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Economics of Cloud Computing


Economics

• Economics is the study of what constitutes balanced human behaviour in the attempt to fulfil needs and wants.

• Economics has always been a powerful force in driving industry transformations and as more and more customers evaluate cloud computing investments that will significantly affect ROI. Source: Unknown / Missing


Economics of the Cloud

• Field of study concerned with Cloud computing

• Deals with the production, distribution, and consumption of IT services.

• Scope not limited to Cloud Computing paradigm’s Financial Benefits. • It is more about choices Cloud customers

make• To inquire into why?

• Economics of the Cloud should show the way and should not confuse the adopters.

Source: Unknown / Missing


Scarcity

• For an Industry, limited resources include

– Capital– Labor force– Technology

• For an organization, resources include - Compute - Storage - Networking

Dev Test Prod

Apps

ENVs

HR

Dev Test Prod

Apps

ENVs

Marketing

Dev Test Prod

Apps

ENVs

Finance

Dev Test Prod

App

ENVs

IT

AppApps


Resource Utilization

Capacity Utilization

OS(Linux)

H/W

App

HR

OS(Linux)

H/W

App

Marketing

OS(Windows)

H/W

App

Finance

OS(Windows)

H/W

App

IT

15% 15% 15% 15%Maximum Utilization

85% 85% 85% 85%Waste of Resources

100% 100% 100% 100%Total Capacity


Virtualization-Resource Utilization

Hardware

Virtual Machine Monitor (VMM) / Hypervisor

Guest OS(Linux)

H/W

App

HR

Guest OS(Linux)

H/W

App

Marketing

Guest OS(Windows)

H/W

App

Finance

Guest OS(Windows)

H/W

App

IT

15% 15% 15% 15%

Total Capacity 100%

60%


Journey towards Cloud

Dedicated Servers

Server Consolidation

Virtualization

Cloud Computing

Time

Res

ourc

e Ut

iliza

tion

1

2

3

4


Immediate Benefits


Opportunity Cost

• Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative foregone (that is not chosen).

• Opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice".

• The opportunity cost of moving to cloud computing is supreme because it entails a commitment in ‘sunk costs’: those are costs that strengthen the business enterprise.

Decrease in some critical values that used to be gained with On Premise Computing

Increase in some values; Business value of Cloud Computing is significantly higher than that of On Premise


Pareto Principle

Infrastructure/Platform Management

Data Center

Server Resources

OS

Platforms

Application Management

Business Focus20%

80%

Application Management

Business Focus

Innovations

Creativity

Agility

80%

Infrastructure/Platform Management

Cloud Resources

20%

Traditional Environment Cloud Environment


Economic Impact

• Fundamental contribution to promote growth and competition

• Economic impact of an innovation in the hardware-software field

– Profound effect on the market structure of many sectors

– On the global macroeconomic performance in the next years.

• Macro and microeconomics are the two vantage points from which the Cloud economy is observed.

– Understanding of cloud phenomena– More informed decisions while using cloud

computing

Economics of the Cloud

Agility

Creativity

Innovation

Social ImpactBenefits

Trade off

Economic Benefits


Agility

• Engineering resource availability– Rapid provisioning of computing resources;– Quick deployment of applications– Agility in new product development, Testing & Deployment

• Business response to changing conditions or opportunity

Source: VMware


Agility

• The agility benefits of cloud computing overshadow the purely cost saving benefits.– It enhances a company’s

ability to bring new products to market

– Improves its capability to expand geographically Source: The European Business Review


Creativity & Innovation

• Continuous examination of opportunities without spending a lot of money and lot of time.




• Enable new business formation and new product development creates what could be called multinational small and medium businesses (SMBs).

Source: http://www.eoi.es



Cloud Computing

GovernmentEducation &

Health

Banking, Finance & Business

Services

Transport & Communica- tions

Distribution, Retail & HotelsManu - facturing

Energy & Utilities

Agriculture, Forestry &

Fishing


Social Impact

• “Green” IT

• Global Collaboration

• Services to be delivered to developing nations which have limited access to IT

• Employment impacts– Indirect and induced economic activity that arises from the result of the cost saving and business ‐

development impacts– Direct employment impacts resulting from business creation.

• Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. E.g. VMware, Microsoft and Eucalyptus in Private Cloud


Benefits

• Economies of Scale• Multi-Tenancy• Capacity Utilization• “Zero” capex model• Long term TCO of the IT

paradigm that support business

• Support for new business models which were constrained by the resources in the past– Big data processing

• Competitive Advantages

• Speed and Flexibility of business Changes– On Demand self service– Automation– Standardization– Elasticity– Pay per Use Model– Reduced time to market

• Complete focus on Business• Efficiency in global

communication and collaboration


Trade off

• Security• Loss of Control• Availability• Reliability• Speed• Cost• Learning Curve• Quality of support• Change in organization

culture• Interoperability and

Standards

• Privacy and Data Confidentiality

• Shift in Liability• Regulatory Compliance• Transparent Infrastructure

Scalability• Application Deployment

Mechanisms• Economic Modeling of new

Market• Portability for Legacy IT in

Clouds


Economic Benefits

Source: Microsoft


Economic Benefits



Comparison of Basic Cost Savings Variables for Public and Private Sector Cloud Customers

http://safegov.org/2011/11/1/government-decision-making-the-economics-of-cloud-computing


Value Model


Business Models for Cloud

Models ExamplesCommunications, Conversations Telephony, MicroblogsCorrespondences search and dating sitesCollaboration, Competition, Commerce

on-line gaming, vertical market sites, on-line auctions

Clearing On-line payments Conversion audio and video bridging, currency servicesCommunity Social networking sitesCrowd sourcing On-line movie rental / streaming sites, news or tagging sites with

popularity voting or recommendation engines.

Commons - Collections online book or patent databasesContinuous Cross-Device Access, Continuous Cross-Network Access

Web mail or photos accessible from your laptop or your smart phone, or anyone else’s, if you choose.

Cost Electricity, cheaper to buy from the grid than run a nuclear power plant in your back yard

Comparative Advantage - Context vs. Core

Outsourcing HR, CRM, tax prep, or stock picking via a mutual fund.

Capabilities and Competencies proprietary search algorithms and heuristicsCelerity software, platform, or infrastructure as a serviceCustomer Experience - Convenience Content and application delivery networks.

Consistency - Currency - Change Control - Coordination

Any SaaS service.

Checkpoints Network-based firewalls, anti-DDoS, email filtering for anti-virus or anti-spam.

Chokepoints Network traffic management, in digital networks, air traffic networks (gate delays), or highways.


Country impact on timeframe

India 7% 36% 43% 14% 14

Japan 0% 9% 9% 82% 11

China 25% 13% 38% 25% 8

JCI 9% 21% 30% 39% 33

< 6 months< 12

months12 – 24 months

2 – 3 yearsTotal

numberOVUM Research


Cloud Adoption Trends By Industry


Cloud Adopters


Laws of Cloudonomics

• Cloudonomics Law #1: Utility services cost less even though they cost more. Although utilities cost more when they are used, they cost nothing when they are not. Consequently, customers save money by replacing fixed infrastructure with Clouds when workloads are spiky, specifically when the peak-to-average ratio is greater than the utility premium.

• Cloudonomics Law #2: On-demand trumps forecasting. Forecasting is often wrong, the ability to up and down scale to meet unpredictable demand spikes allows for revenue and cost optimality.

• Cloudonomics Law #3: The peak of the sum is never greater than the sum of the peaks. Enterprises deploy capacity to handle their peak demands. Under this strategy, the total capacity deployed is the sum of these individual peaks. However, since clouds can reallocate resources across many enterprises with different peak periods, a cloud needs to deploy less capacity.

• Cloudonomics Law #4: Aggregate demand is smoother than individual. Aggregating demand from multiple customers tends to smooth out variation. Therefore, Clouds get higher utilization, enabling better economics.

• Cloudonomics Law #5: Average unit costs are reduced by distributing fixed costs over more units of output. Larger cloud providers can therefore achieve some economies of scale.


Laws of Cloudonomics

• Cloudonomics Law #6: Superiority in numbers is the most important factor in the result of a combat (Clausewitz). Service providers have the scale to fight rogue attacks.

• Cloudonomics Law #7: Space-time is a continuum. Organizations derive competitive advantage from responding to changing business conditions faster than the competition. With Cloud scalability, for the same cost, a business can accelerate its information processing and decision-making.

• Cloudonomics Law #8: Dispersion is the inverse square of latency. Reduced latency is increasingly essential to modern applications. A Cloud Computing provider is able to provide more nodes, and hence reduced latency, than an enterprise would want to deploy.

• Cloudonomics Law #9: Don’t put all your eggs in one basket. The reliability of a system increases with the addition of redundant, geographically dispersed components such as data centers. Cloud Computing vendors have the scale and diversity to do so.

• Cloudonomics Law #10: An object at rest tends to stay at rest. A data center is a very large object. Private data centers tend to remain in locations for reasons such as where the company was founded, or where they got a good deal on property. A Cloud service provider can locate greenfield sites optimally.


Additional Slides


Cloud: Boon for SMBs

• SMBs– Academia – Start-ups to corporations– Technology providers – Pay-as-you-go/grow model


Business Processes and Paradigm Shift

• On-premises to On cloud• Development• Testing • New applications for the cloud• Hosting and supporting cloud

applications


Business Drivers

• To slash IT costs and technology costs• Business Process Improvement

– To Standardize Applications and the Business Operations• Business Intelligence out of Big Data Processing• Availability• Cost Benefit of going for a Operating Expense (OpEx) based approach vs

Capital expenditure (CapEx) based approach in traditional IT• Time-to-Market improvement• Fast scale-up or scale-down of resources, with utility-based pricing model• Simple, Efficient, Agile, on-demand provisioning of all “data center

resources”• Innovations in technology• Proficient Resource management • Competitive Advantage: The ability to do development and testing, better,

faster, or at lower cost than the competitor.• Environmental Benefits


Mobile Cloud Computing

• Emerging trend is a shift from Cloud computing to Flexible Cloud computing and that is, “Mobile Cloud Computing-Salesforce.com

• ABI Research forecasts that the number of mobile cloud computing subscribers worldwide will grow rapidly over the next 5 years; rising from 42.8 million subscribers in 2008, (approximately 1.1% of all mobile subscribers) to just over 998 million in 2014 (nearly 19%).


Industry wise Cloud Adoption


Cloud-Fit Applications and Verticals

•Front Office:CRM, Demand Generation

•Enterprise Services:HR, Procurement

Banking & Investment Services

•Channel Mgmt: Advertising,Placement, Display, Search

•Content Mgmt:3D Rendering, Content Delivery

Media

•Energy Supply:ETRM(small/single commodity)

Energy & Utilities

•Administration& Finance: Grants Management

•Public Safety & Justice:Crime analysis

Government

•Corporate: F & A (payroll)

•Clinical: Physician EMR

Healthcare

•Front Office:CRM, Distributor Portals

•Core: Document Management

•Enterprise Services:HR, Procurement

•Infrastructure: Storage

Insurance

•Business Applications: CRM

•Corporate: Web Teleconferencing

Manufacturing

•E-Commerce

Retail

•Cargo portals ,Maintenance, repair & overhaul, Transportation management systems, On-line travel shopping, booking, ticketing, Loyalty management Import/export management

Transportation

•Procure to Pay: SupplierMgmt

•Supply Chain Exec/Optimization: Global Trade Mgmt, Transportation Mgmt

Wholesale Trade


Inhibitors

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Economics of Cloud Computing

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