THE ECONOMICS OF THE CLOUD

Question 1

3 areas of cloud advantage of significant economies of scale

Answer 1

1. Supply-side savings: Large-scale data centers lower costs per server. —> the economies of scale emanate from the following areas:
   * Cost of power
   * Infrastructure labour costs: While cloud computing significantly lowers labor costs at any scale by automating many repetitive management tasks, larger facilities are able to lower them further than smaller ones —> IT employees to focus on higher value-add activities like building new capabilities and working through the long queue of user requests every IT department contends with
   * Security and reliability: increased need for security and reliability leads to economies of scale due to the largely fixed level of investment required to achieve operational security and reliability
   * Buying power: Operators of large data centers can get discounts on hardware purchases of up to 30 percent over smaller buyers. This is enabled by standardising on a limited number of hardware and software architectures.
2. Demand-side aggregation: Aggregating demand for computing smooths overall variability, allowing server utilization rates to increase. —> sources of utilisation variability:
   * Randomness: ex. people check their email at different times. To meet service level agreements, capacity buffers have to be built in to account for a certain probability that many people will undertake particular tasks at the same time —>If servers are pooled, this variability can be reduced.
   * Time-of-day patterns: There are daily recurring cycles in people‘s behavior: consumer services tend to peak in the evening, while workplace services tend to peak during the workday. Capacity has to be built to account for these daily peaks —> variability can be countered by running the same workload for multiple time zones on the same servers

• Industry-specific variability: ex. Retail firms see a spike during the holiday shopping season while U.S. tax firms will see a peak before April 15 —> capacity has to be built for the expected peak (plus a margin of error)
• Multi-resource variability: Compute, storage, and input/output (I/O) resources are generally bought in bundles. While it‘s possible to adjust capacity by buying servers optimized for CPU or storage, this addresses the issue only to a limited degree because it will reduce flexibility and may not be economic from a capacity perspective.
• Uncertain growth patterns: The difficulty of predicting future need for computing resources and the long lead- time for bringing capacity online is another source of low utilization

3. Multi-tenancy 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. —> ex. Shared office 365. This has 2 economic benefits:
   * Fixed application labor amortised over a large number of customers: each customer has to pay for its own application management, while in a multi-tenant
   instance such as Office 365-S, that cost is shared across a large set of customers, driving application labor costs per customer towards zero. This can result in a meaningful reduction in overall cost, especially for complex applications.
   * Fixed component of server utilization amortized over large number of customers: For each application instance, there is a certain amount of server overhead. By moving to a multi-tenant model with a single instance, this resource overhead can be amortized across all customer

Question 2

Harnessing cloud economics

Answer 2

Harnessing cloud economics: The best approach in harnessing the cloud economics is different for packaged apps vs. new/custom apps.
- Packaged applications: While virtualizing packaged applications and moving them to cloud
virtual machines can generate some savings, this solution is far from ideal and fails to capture the full benefits outlined. Causes:
1. Applications designed to be run on a single server will not easily scale up and down without significant additional programming to add load-balancing, automatic failover, redundancy, and active resource management
2. Traditional packaged applications are not written for multi-tenancy, and simply hosting them in the cloud does not change this
- New/custom applications: Infrastructure-as-a-Service (IaaS) can help capture some of the
economic benefits for existing applications —> The full advantage of cloud computing can only be properly unlocked through a significant investment in intelligent resource management.

Question 3

THE ECONOMICS OF THE CLOUD: implications + concern

Answer 3

Possibilities and obstacles: Many IT leaders today are faced with the problem that 80% of the budget is spent on ―keeping the lights on,‖ maintaining existing services and infrastructure —> This leaves few resources available for innovation or addressing the never- ending queue of new business and user requests. Cloud computing will free up significant resources that can be redirected to innovation.

However, lower TCO is only one of the key drivers that will lead to a renewed level of innovation within IT:
* Elasticity is a game changer: Being able to both scale up and scale down resource intensity nearly instantly enables a new class of experimentation and entrepreneurship
* Elimination of capital expenditure: will significantly lower the risk premium of projects, allowing for more experimentation
* Self-service through a simple web portal rather than through a complex IT procurement and approval chain can lower friction in the consumption model, enabling rapid provisioning and integration of new services
* Reduction of complexity

Current concerns:
* Legal compatibility
* Security and privacy
* Maturity and Performance: Unlike on-premises outages, cloud outages are often highly visible and may increase concerns
Compliance and data sovereignty: Enterprises are subject to audits and oversight, both internal and external. Companies in many countries have data sovereignty requirements that severely restrict where they can host data services. CIOs ask: which clouds can comply with these systems and what needs to be done to make them compliant?

Question 4

Private cloud + cost trade-off

Answer 4

Private clouds:
There is a distinction between whether the IT resources are shared between many distinct organizations (public cloud) or dedicated to a single organization (private cloud).
* A key difference between private and public clouds is the scale and scope at which they can pool demand.
* Private clouds can address some of the previously mentioned adoption concerns. By having dedicated hardware, they are easier to bring within the corporate firewall, which may ease concerns around security and privacy. Bringing a private cloud on-premise can make it easier to address some of the regulatory, compliance and sovereignty concerns that can arise with services that cross jurisdictional boundaries.
* They do not really differ from public cloud regarding other concerns, such as maturity and performance

Cost trade-off
* While the public cloud addresses all sources of variability the private cloud can address only a subset.
* The public cloud curve is lower at every scale due to the greater impact of demand aggregation and the multi- tenancy effect. Global scale public clouds are likely to become extremely large, or possibly much larger, whereas the size of an organization‘s private cloud will depend on its demand and budget for IT.
* Organizations with a very small installed base of servers (<100), private clouds are prohibitively expensive compared to public cloud

Finding the balance today: Weighing the Benefits of Private Cloud against the Costs
* The size of the circles reflects the total server installed base of companies of each type.
* The bottom-right quadrant thus represents the most attractive areas for private clouds (relatively low cost premium, high preference