Do the costs of the cloud outweigh the benefits?

FOR THE In the past decade, few aspects of modern life have geeks drool over more than the cloud, the cumulus cloud of data centers dominated by three US tech giants, Amazon, Microsoft and Google, as well as Alibaba. in China. In America, some compare their position of impregnability to that of the big three automakers of Detroit, Ford, General Motors and Chrysler a century ago. During the covid-19 pandemic, they helped transform people’s lives, supporting online medical appointments, Zoom meetings, and Netflix frenzy. They attract the brightest engineering talent. Amazon Web Services (AWS), the largest, is now part of business folklore. It is therefore bordering on heresy to assert, as the executives of Andreessen Horowitz, a venture capital firm, recently did, that the cloud threatens to become a burden around the necks of large companies.

Perhaps this explains the defensive attitude of Martin Casado of Andreessen Horowitz, co-author of the blog post titled “The Cost of the Cloud: A Trillion Dollar Paradox.” On June 24, he described it at a rally on Clubhouse, a social media app, as “one of the most misinterpreted and misquoted things I’ve ever done.” At the risk of being further distorted, Schumpeter would sum it up as follows. He uses paltry evidence and bewildering numbers (where, say, the “trillions of dollars” come from?) To come up with an excessively all-or-nothing business conundrum: “You’re crazy if you don’t start in the cloud; you’re crazy if you stay on it. Yet despite all its faults, it is timely. This poses a question that companies will need to think about in the years to come. If they entrust all their data, the lifeblood of the digital economy, to an oligopoly of cloud providers, how much control do they have over their costs?

This is an issue that many businesses are already grappling with. June 29, Information, an online tech publication, reported that iPhone maker Apple is set to spend $ 300 million on Google Cloud this year, a 50% increase from 2020. It also uses AWS and its own data centers to handle the overwhelming demand for services like iCloud, a data storage app. On the same day, the COO of a large software company told your columnist that the current cloud cost trajectory is “unsustainable” but that it doesn’t make sense to just leave the cloud. “It’s very hard. You can’t be as simplistic as saying that everything is cloud forever or that it’s not a cloud.” Jonathan Chaplin of New Street Research compares the acquisition of data storage flexible in the cloud to a flexible office space like WeWork. Both are equally expensive, he says. He knows that his analyst shop is considering leasing both.

One of the reasons Andreessen Horowitz started a storm is because she went further. The blog post raises the prospect of a “repatriation”, arguing that companies could save significant amounts of money by bringing their data from the cloud back to their own servers. He uses the example of Dropbox, a file-sharing company that in 2017 said it had saved $ 75 million in the two years leading up to its IPO, mostly by reclaiming workloads from the cloud. Mr. Casado and his colleague Sarah Wang estimate that a group of 50 publicly traded software companies could cut their cloud bills in half by doing the same, collectively saving $ 4 billion a year. This could, using generous price-earnings multiples, improve their market value by around $ 100 billion. You don’t have to be a super-sleuth to suspect an ulterior motive: If the unicorns of Silicon Valley take notice, higher valuations could earn venture capitalists like Andreessen more money. Horowitz when they are made public.

This is an oversimplification, however, in several ways. First, the cloud is not just a cost. It can also increase revenue by giving start-ups the opportunity to grow quickly, accelerate new product launches, and expand internationally without having to create their own hodge-podge of racks, servers, cables and sockets. Plus, cloud providers offer more than storage and spare capacity. Increasingly, their most valuable services are data analytics, prediction, and machine learning, made possible by the vast treasures of data they can tap into. They can also be more difficult to hack. The question is whether a company gets a better ROI by paying for cloud services, or by paying to integrate data centers, engineers and cybersecurity in-house.

Second, the supply of engineers is limited. While in the past coders were trained to work with on-premises servers, the latest generation knows more about working with cloud providers. This makes repatriation more difficult. In a recent podcast on its 2015 decision to move entirely from its own servers to Google Cloud, Spotify, a music streaming app, highlighted the opportunity costs of hiring engineers to run its own centers. data rather than working on new products. (As a geek relic, he keeps pieces of his last big server in an urn.)

Third, the profits are in the eye of the beholder. A company can hope to improve its margins by reducing the cost of renting cloud servers. But building your own data centers requires investment. Labor costs will also increase to pay engineers to manage them.

The silver lining?

There’s not much to suggest that the cloud rush is slowing down. Gartner, a data collector, predicts that global spending on cloud services will increase by nearly a quarter this year, to more than $ 330 billion. Repatriation is “an urban myth,” says Sid Nag, vice president of research at Gartner. “We just don’t see it. “

Continuing to write blank checks to cloud providers is also not sustainable. The more companies adopt cloud computing, the more carefully they must manage its costs. Bigger users, like Apple, negotiate huge discounts. The little ones lack weight. To reduce costs, they may need to run basic storage in-house, diversify into “multicloud” by spreading IT across multiple clouds, and hold engineers accountable for cloud expenses. With luck, a cheap alternative to the bigger clouds will emerge, just as Japanese automakers challenged the Detroit Big Three. It took half a century, however. ■

This article appeared in the Business section of the print edition under the headline “It’s raining on the parade”