The economics of cloud computing

We’ll look at the consumption-based model, one of the two economic characteristics of cloud computing compared to traditional computing economics; the second economic characteristic that cloud computing is based upon is the cost expenditure model of OpEx.

Consumption-based model?

In a nutshell, a consumption model means paying only for what you use, for the time you use the resource; this can be likened to leasing/renting something instead of outright purchasing and owning the asset. Some resources such as virtual machines can be stopped and started to reduce costs, so you only pay while running them; this is one of the key business benefits of the cloud computing cost model over a traditional computing cost model.

This section introduced the consumption-based model of cloud computing. The following section takes a closer look at the cost expenditure models.

Defining the expenditure models

It is essential to define some finance terms to understand OpEx and CapEx:

• CapEx: The upfront commitment of a large amount of money to purchase assets such as investment in data center facilities, network circuit implementation, physical hardware, or software, as a one-off payment that you then own for the lifespan of those assets. You can liken this to the model of purchasing a vehicle or a mobile phone handset outright with a sum of money. You own it until it needs replacing, so you have to find another lump sum of money to reinvest to purchase another one outright in a few years.
• OpEx: Essentially, a pay as you go model for consuming assets and resources. These are the running costs and are ongoing, which require a recurring payment when the asset or resource is required and in use to deliver service or functionality to a business. This could include staffing costs, data center facility management costs, power, and software that is not purchased outright but leased on a subscription basis. There is no upfront commitment of money to buy assets; you pay every month as you use the assets, only for the amount you use during a certain period. You can liken this to the model of renting a vehicle or mobile phone handset and paying every month. You never own the asset; you use it for as long as you need, and you may swap it, upgrade, and downgrade as you wish within the terms:

Figure 2.9 – Cost expenditure models

The value of cloud computing to a business is not so much the technology but the economic model it provides. The utilization of an OpEx model instead of the CapEx cost expenditure model associated with traditional computing is generally the value driver, with the technology being secondary.

This section outlined the cost expenditure models for a business that apply to cloud computing and traditional computing models. The following section looks at how those expenditure models are used and the benefit and value of cloud computing’s OpEx model.