Infrastructure as a service (IaaS) is one of the biggest drivers of corporate cloud demand. While most will adopt private cloud, some are using the public cloud and cost is one of the many reasons. In this article we discuss a top-down comparison of the two based on the economic theory of experience curves to see which is the most cost-effective.

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Cloud Infrastructure;
Public or Private?
A cost perspective
By Reinout Schotman

2. 2 | Whitepaper
Infrastructure as a service (IaaS) is one of the biggest drivers of
corporate cloud demand. While most will adopt private cloud,
some are using the public cloud and cost is one of the many
reasons. In this article we discuss a top-down comparison of the
two based on the economic theory of experience curves to see
which is the most cost-effective.
In the late ‘60s Bruce Henderson, founder of BCG, developed the
theory of the experience curves:
“Cost of value added declines approximately 20 to 30% each
time accumulated experience is doubled.”
The theory is based on observation and can be applied to any
industry, including IT.
In the past, we measured the size of an IT infrastructure by
counting the number of servers; today, we measure virtual
machines (VMs). In the past, one processor equated to one
VM. With today’s multi-core CPU technology, a minimal VM is
typically scaled to 1 CPU core.
This suggests that Enterprise A, with a private data centre twice
the size of Enterprise B, should expect 20 to 30% lower cost
per VM. Similarly, a public data centre of 10 times the size of an
enterprise should therefore operate at 50 to 70% lower cost.
Clearly there are differences in the business models, not least
of which is the need for a public data provider to make an
operational margin to meet profitability, and this will affect the
calculation. Typically, direct cost of service may represent up
to 50% of revenues. This means that if the enterprise sources a
VM through a public infrastructure provider ten times its size, it
would cost approximately 0-40% less than if he sources it on his
private data centre.
How large are public data centres?
This information is among the best-kept,
strategic trade secrets in the industry. It is
also a highly variable number, dependent
on the market and purpose. But looking
at the educated guesses of many well
informed researchers, a reliable consensus
emerges as to the number of physical
servers at some of the large providers:
• Google: 1,800,000 in January 2012
• Amazon: 450,000 by March 2012
• Microsoft: 520,000 in August 2011
• Akamai: 110,000 by August 2012
• Facebook: 200,000 by July 2012
• Apple has built a new data centre that
can house up to 2.5 million servers, but
this is thought to be mainly empty at
this moment.
Furthermore, it seems that capacity
doubles every 3 years, which suggests an
on-going, annual cost reduction of about
9% per server.
That is huge. Enterprise data centres will
vary significantly by type of business, but
we can assume that a data centre of 2,000
servers is quite large.
Using Amazon and Microsoft, with
significant presence in the enterprise
market through their Amazon Web
Services and Microsoft Azure offerings,
may cost 25% of an enterprise data
centre of 2,000 servers. This means
that cost equilibrium size is achieved
at approximately 100,000 servers in an
enterprise data centre.
TCO for a 1 core, non-shared Microsoft
Azure Windows VM is $700 per year. In the
enterprise with 2,000 physical servers it
therefore would cost approximately $3,000
per VM. An enterprise data centre of 2,000
servers could reduce its typical annual TCO
from $25 million to less than $7 million by
outsourcing to the public cloud.
Cloud computing is driven by economies of
scale. A theory explains the implication for
enterprise data centres.

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It seems that security is a significant factor
when enterprises are deciding on which
model to adopt. But are the risk assessors
looking at the right information? Security is
assurance, compliance and data privacy. If
designed well, and thanks to economies of
scale, in many cases public cloud solutions
will be more secure.
Microsoft Azure offers 99.9% availability, far
higher than most enterprise data centres
will admit to. In addition, enterprises
may have limited security staff and non-
industrialised processes. Large cloud
providers have significant resources at
their disposal enabling them to have best-
practice processes and provide
excellent security.
Compliance is changing too. Recently
DNB, the Dutch central bank, removed a
significant compliance hurdle for banks so
they can use cloud services from Microsoft.
It is expected that other providers will be
certified soon and the trend is spreading to
other sectors. For example, the European
Commission is implementing a cloud
computing strategy to harmonise policies
and remove barriers for cloud adoption
within the EU.
Besides security and operational costs,
there is the cost of migration. This can be
significant and depend on the applications
that are supported. But by gradually
migrating existing servers and their
applications, while taking an aggressive
approach on new services, migration costs
can be mitigated.
But these are small details. The cost benefits
show that a key driver for demand of public
cloud is economies of scale. Without doubt,
the cost benefits are large enough that they
should not be ignored by enterprises and
the difference is still growing. It’s time to
think public.
Why do enterprises have a preference for private cloud?
$100,000
$10,000
$1,000
$100
$100 $1,000 $10,000 $100,000 $1,000,000
CPU cores in data centre (logarithmic scale)
AnnualTCOper1-coreVM(logarithmicscale)
Figure 1: Experience curves for data centres (Canopy analysis, 2013)

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About the Author
Reinout Schotman is Associate Partner at Canopy
Cloud - Consulting and leader in the field of cloud
computing. Prior to joining Canopy Cloud in 2013,
Reinout worked at Accenture and several international
telecom firms. Reinout holds a MSc in Applied Physics
of Delft University of Technology.
For more information on how Canopy Cloud helps
organisations to benefit from the cloud, please contact:
Reinout Schotman
reinout.schotman@atos.net
+31 6 11 14 19 16
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