The cost of cloud adoption

Most people assume that running applications in the cloud, and specifically on Amazon Elastic Compute Cloud, is automatically less expensive then running in your own data center.

The short answer is that the EC2 may not actually be the cheapest route, but it can provide faster time to market and additional revenue, even if it actually costs more to run.

I read a post on Geva Perry's Thinking Out Cloud blog Sunday that got me thinking about cloud economics, and if there is a missing link in the costs associated with cloud services and specifically what happens if you run everything you own on EC2 24 hours a day, seven days a week, 356 days a year.

Geva illustrates the point:

In other words, let's say you're buying a server from Dell for $5,800, and you expect to use that server for three years. You also have to pay a 10 percent annual maintenance fee on that server, so the total cost over three years is $7,540. Amazon, on the other hand, charges 40 cents per hour for an equivalent large instance on EC2. A simple calculation will show that using the EC2 instance for three years would cost you:

4 cents x 24 hours a day x 365 days a year x 3 years = $10,512

And that's excluding other charges from Amazon for bandwidth usage and other services, but it includes maintenance, which falls on Amazon. This also assumes that you are using the Amazon Machine Image 24-7-365, which may not be true, but we'll get to that later.

In essence, you are borrowing money from Amazon to buy a server, and paying the loan back to them in monthly payments of $292 ($10,512 over 36 months). Which means it's an annual interest rate of roughly 15 percent. Is that a good deal? Maybe.

As I explained in my $1 million example above, it all depends on your situation and alternatives: for example, can you invest that money is sales, marketing, R&D, and other activities that will produce more than a 15 percent annual return?

For many users, cost won't be the leading factor in cloud adoption (as witnessed in the math above). Control and security will trump everything else. And if you have just one company using the cloud, many other issues of multitenancy go away, reducing the time from development to production.

At this point, with Amazon as the hulking giant, the first company to implement a near-clone of EC2 and its associated components that you can deploy internally has a huge available market.