On the true cost of the cloud

Andreessen Horowitz opinion piece warns of the "trillion dollar paradox" and the "flexibility tax" of a move to the cloud.

An article, The Cost of Cloud, a Trillion Dollar Paradox by Sarah Wang and Martin Casado from Andreessen Horowitz provides some answers to Oil IT Journal Editor Neil McNaughton’s musing on ‘why the cloud?’ when he supposed that ‘the unstated aim is to reduce or eliminate the cost of an on-premise data center’. The findings of the AH investigation back this up with some interesting caveats.

It turns out that for a startup, more interested in ‘innovation, agility, and growth’ than in costs, the cloud is a great choice. But as the company matures, this situation evolves. As the business model stabilizes, the cost of maintaining the flexibility of the cloud turns into what AH call the ‘flexibility tax’. For large companies, the tax can equate to ‘hundreds of billions of dollars of equity value’. And this tax is levied ‘after the companies have already, deeply committed themselves to the cloud and are often too entrenched to extricate themselves*’.

The cost of the cloud itself becomes more material as time goes on and AH speculates that the ‘30% margins currently enjoyed by cloud providers’ is unlikely to go away ‘given that the majority of cloud spend is currently directed toward an oligopoly of three companies’. AH concludes that, for a startup, ‘You’re crazy if you don’t start in the cloud’ but that as things progress, ‘you’re crazy if you stay on it’. Repatriation is then a consideration, BH reports that one large consumer internet company found public cloud list prices to be ‘10 to 12x the cost of running one’s own data centers’.

But oil and gas companies are rather mature in IT terms so the ‘startup’ argument may not apply. A simple ‘lift and shift’ of a mature datacenter to the cloud may just mean ponying up for the ‘tax’. Read the full AH analysis on a16z.com.

* This recalls the situation a couple of decades ago when outsourced document management led to prohibitively expensive information retrieval.

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