1. The document discusses the economics of cloud computing and how cloud represents both a technological and economic shift compared to traditional computing models like mainframes and client-server architectures. 2. Cloud benefits from strong economies of scale in areas like data center costs, server utilization, and multi-tenancy. Larger cloud providers have significantly lower costs per server. 3. Over time, more organizations will shift workloads to public clouds due to the advantages of scale, lower costs, and flexibility compared to private clouds or on-premises infrastructure.

1. CLOUD ECONOMICS
ROLF HARMS
MARCH 2011
CORPORATE STRATEGY GROUP 1

2. EARLY DAYS OF THE AUTOMOBILES…
CORPORATE STRATEGY GROUP 2

3. THE HORSELESS CARRIAGE SYNDROME
Sales "If I had asked my customers what they wanted, they would
have said a faster horse."
- Henry Ford
Analysts “The horse is here to stay but the automobile is only a
novelty, a fad.”
- Bank analyst
Engineering …designed whip holders into the automobiles for the first
6-7 years, even though there was no horse…
Marketing “There will never be more than 1 million units because of
the limited availability of good drivers”
- Daimler Company
(there were 8 million by 1918, over 600 million today)
CORPORATE STRATEGY GROUP 3

4. EARLY DAYS OF CLOUD…
“The cloud services companies of all "Maybe I'm an idiot, but I have no idea
sizes…The cloud is for everyone. what anyone is talking about. What is
Vs. it? It's complete gibberish. It's insane.
The cloud is a democracy.”
When is this idiocy going to stop?”
“Biggest change in IT in last 20 years..”
CORPORATE STRATEGY GROUP 4

5. COMPUTING PARADIGM DISRUPTIONS
More than just a technology shift…
TECHNOLOGY ECONOMIC
MAINFRAME
• Centralized compute & • Optimized for efficiency
storage, thin clients due to high cost
CLIENT-SERVER
• PCs and servers for • Optimized for agility due to
distributed compute, low cost
storage, etc.
CLOUD
• Large DCs, commodity HW,
scale-out, devices ?
CORPORATE STRATEGY GROUP 5

6. 1. SUPPLY-SIDE ECONOMIES OF SCALE
Larger datacenters have almost 50% lower TCO per server
MAIN DATA CENTER COST BUCKETS ANNUAL TCO/SERVER DECLINES W/SCALE
$5,000
• Server hardware costs (~45%)
$4,000
• Facility & operations (~25%)
TCO/Server
$3,000
• Hardware labor costs (~15%) $2,000
$1,000
• Power costs (~15%)
$0
1k Server DC 100k Server DC
Server Hardware Facility Hardware Operations Power
CORPORATE STRATEGY GROUP 6

7. 2. DEMAND SIDE ECONOMIES OF SCALE
Average server utilization rates are 5-10%
100%
75%
CPU Utilization
50%
25%
0%
Time
CORPORATE STRATEGY GROUP 7

8. TIME OF DAY VARIABILITY
CORPORATE STRATEGY GROUP 8

9. INDUSTRY VARIABILITY
Retail
Tax Services
Source: Alexa Internet
CORPORATE STRATEGY GROUP 9

10. UNCERTAIN GROWTH
DEMAND FORECASTING OVERPROVISIONING DRIVERS
• Uncertain Demand
• High cost of outage
• Long lead times for new
capacity
CORPORATE STRATEGY GROUP 10

11. 3. BENEFITS OF MULTI-TENANCY
SINGLE-TENANT APPLICATION
Client Client
Instance Instance Instance
Admins Admins Admins
Resources Resources Resources
CORPORATE STRATEGY GROUP 11

12. 3. BENEFITS OF MULTI-TENANCY
MULTI-TENANT APPLICATION
Instance Instance Instance
Admins Admins Admins
Resources Resources Resources
CORPORATE STRATEGY GROUP 12

13. OVERALL ECONOMIES OF SCALE
CORPORATE STRATEGY GROUP 13

14. PUBLIC AND PRIVATE CLOUDS
PRIVATE CLOUD PUBLIC CLOUD
1) Supply-side 
2) Demand-side
3) Multi-tenancy
CORPORATE STRATEGY GROUP 14

15. PUBLIC AND PRIVATE CLOUDS
CORPORATE STRATEGY GROUP 15

16. PUBLIC AND PRIVATE CLOUDS
• Technology
improvements
• Increased public
cloud scale
Public Cloud Economics
• Increasing
comfort
• Decentralized IT
• New public-only
services
Private Cloud Preference
CORPORATE STRATEGY GROUP 16

17. PUBLIC vs. PRIVATE – PORTFOLIO APPROACH
Midsize Company Example
Public Cloud Economics
Private Cloud Preference
CORPORATE STRATEGY GROUP 17

18. SPEED OF ADOPTION
100%
80%
% Enterprise Adoption
60%
40%
20%
0%
1955 1965 1975 1985 1995
Source: Teng, Grover, and Güttle, 2002
CORPORATE STRATEGY GROUP 18

19. LOWER PRICES WILL DRIVE ADDITIONAL IT INNOVATION
‘KEEPING LIGHTS ON’ DOMINATES IT …BUT CLOUD COST SAVINGS WILL ONLY
BUDGETS…. INCREASE USAGE, DRIVING INNOVATION
11% $120 1,000
New App
Development
36% 750
$80
Existing App
89% Maintenance 500
53% $40
Infrastructure 250
$0 0
Current IT Spending
Cost of Storage ($/GB, LHS)
Total Capacity Shipped (Exabytes, RHS)
CORPORATE STRATEGY GROUP 19

20. LOWER FRICTION WILL ENABLE NEW SCENARIOS
Traditional IT Cloud
CPU X
1,000 hrs
1 CPU for 1,000hrs
CPU
CPU
CPU X
1 hr
1,000 CPUs for 1hr
Weeks/months to Minutes/hours to
provision resources provision resources
CAPEX OPEX
Rigid, disconnected Loosely coupled,
systems flexible, & connected
systems
CORPORATE STRATEGY GROUP 20

21. CASE STUDY: VIRTUALIZATION
Virtualization drove significant net new demand for OS instances
300%
% of OS Instances
200%
Net new
100%
0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Traditional Physical Machines Virtual Machines
Source: Lazard Capital Markets
CORPORATE STRATEGY GROUP 21

22. CASE STUDY: CONSUMER INTERNET
Source: Wired, 2010
CORPORATE STRATEGY GROUP 22

23. SUMMARY
1. Cloud represents both a technology and an
economic shift
2. Cloud characterized by strong economies of
scale
3. Long term shift towards shared, public
clouds
4. Drastically lower cost & friction will boost
innovation
CORPORATE STRATEGY GROUP 23

24. WE PUBLISHED A WHITEPAPER WITH OUR FINDINGS..
http://ow.ly/38gIf
rolfh@microsoft.com
CORPORATE STRATEGY GROUP 24