Economics of the Cloud

Posted by Rolf Harms, Director, Corporate Strategy Group
Michael Yamartino, Manager, Corporate Strategy Group

Information technology is undergoing a seismic shift towards the cloud, a disruption we believe is as game-changing as the transition from mainframes to client/server.  This shift will impact every player in the IT world, from service providers and systems architects to developers and end users.  We are excited about this transformation and the vast improvements in efficiency, agility and innovation it will bring.

To prepare for the cloud transition, IT leaders who make investments in infrastructure, architectures, and skills have a critical need for a clear vision of where the industry is heading.  We believe the best way to form this vision is to understand the underlying economics driving this long-term trend.  We’ve done extensive analysis of these economics in Microsoft’s Corporate Strategy Group, leveraging Microsoft’s experience with cloud services like Windows Azure, Office 365, Windows Live, and Bing. We decided to share these insights with our customers, partners and the broader industry by publishing a new whitepaper, “The Economics of the Cloud.”

Our analysis uncovers economies of scale for cloud that are much greater than commonly thought.  We believe that large clouds could one day deliver computing power at up to 80% lower cost than small clouds.  This is due to the combined effects of three factors: supply-side economies of scale which allow large clouds to purchase and operate infrastructure cheaper; demand-side economies of scale which allow large clouds to run that infrastructure more efficiently by pooling users; and multi-tenancy which allows users to share an application, splitting the cost of managing that application.

In “The Economics of the Cloud” we also discuss how these economics impact public clouds and private clouds to different degrees and describe how to weigh the trade-off that this creates.  Private clouds address many of the concerns IT leaders have about cloud computing, and so they may be perfectly suited for certain situations.   But because of their limited ability to take advantage of demand-side economies of scale and multi-tenancy, we believe that private clouds may one day carry a cost that is as much as 10x the cost of public clouds.

The conclusions of this paper are a powerful motivator behind Microsoft’s commitment to the cloud.  We invite you to read the full paper to share in our vision.  Microsoft is committed to bringing the best features of the cloud to developers and users, both through our Windows Azure platform and our Office 365 applications.  This transformation will take time, but as they say, ‘the journey is half the fun’, so we hope that you’ll join us on this exciting journey to the cloud.

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