1 CORPORATE STRATEGY GROUP

CLOUD ECONOMICS ROLF HARMS

MARCH 2011

2 CORPORATE STRATEGY GROUP

EARLY DAYS OF THE AUTOMOBILES…

3 CORPORATE STRATEGY GROUP

THE HORSELESS CARRIAGE SYNDROME

"If I had asked my customers what they wanted, they would have said a faster horse."

- Henry Ford

“There will never be more than 1 million units because of the limited availability of good drivers”

- Daimler Company

Marketing

Engineering

Sales

“The horse is here to stay but the automobile is only a novelty, a fad.”

- Bank analyst

Analysts

…designed whip holders into the automobiles for the first 6-7 years, even though there was no horse…

(there were 8 million by 1918, over 600 million today)

4 CORPORATE STRATEGY GROUP

EARLY DAYS OF CLOUD…

"Maybe I'm an idiot, but I have no idea what anyone is talking about. What is it? It's complete gibberish. It's insane. When is this idiocy going to stop?”

Vs.

“The cloud services companies of all sizes…The cloud is for everyone. The cloud is a democracy.”

“Biggest change in IT in last 20 years..”

5 CORPORATE STRATEGY GROUP

MAINFRAME

• Centralized compute & storage, thin clients

• Optimized for efficiency due to high cost

CLIENT-SERVER

• PCs and servers for distributed compute, storage, etc.

• Optimized for agility due to low cost

CLOUD

• Large DCs, commodity HW, scale-out, devices ?

COMPUTING PARADIGM DISRUPTIONS

TECHNOLOGY ECONOMIC

More than just a technology shift…

6 CORPORATE STRATEGY GROUP

1. SUPPLY-SIDE ECONOMIES OF SCALE

Larger datacenters have almost 50% lower TCO per server

• Server hardware costs (~45%)

• Facility & operations (~25%)

• Hardware labor costs (~15%)

• Power costs (~15%)

ANNUAL TCO/SERVER DECLINES W/SCALE MAIN DATA CENTER COST BUCKETS

$0

$1,000

$2,000

$3,000

$4,000

$5,000

1k Server DC 100k Server DC

TC

O/S

erv

er

Server Hardware Facility Hardware Operations Power

7 CORPORATE STRATEGY GROUP

2. DEMAND SIDE ECONOMIES OF SCALE

Average server utilization rates are 5-10%

0%

25%

50%

75%

100%

CP

U U

tiliz

atio

n

Time

8 CORPORATE STRATEGY GROUP

TIME OF DAY VARIABILITY

9 CORPORATE STRATEGY GROUP

INDUSTRY VARIABILITY

Tax Services

Retail

Source: Alexa Internet

10 CORPORATE STRATEGY GROUP

UNCERTAIN GROWTH

• Uncertain Demand

• High cost of outage

• Long lead times for new capacity

DEMAND FORECASTING OVERPROVISIONING DRIVERS

11 CORPORATE STRATEGY GROUP

Instance

Client

Admins

Resources

Instance

Client

Admins

Resources

Instance

Admins

Resources

SINGLE-TENANT APPLICATION

3. BENEFITS OF MULTI-TENANCY

12 CORPORATE STRATEGY GROUP

Instance

Admins

Resources

Instance

Admins

Resources

Instance

Admins

Resources

MULTI-TENANT APPLICATION

3. BENEFITS OF MULTI-TENANCY

13 CORPORATE STRATEGY GROUP

OVERALL ECONOMIES OF SCALE

14 CORPORATE STRATEGY GROUP

PUBLIC AND PRIVATE CLOUDS

1) Supply-side

2) Demand-side

3) Multi-tenancy

PRIVATE CLOUD PUBLIC CLOUD

15 CORPORATE STRATEGY GROUP

PUBLIC AND PRIVATE CLOUDS

16 CORPORATE STRATEGY GROUP

Pu

blic

Clo

ud

Eco

no

mic

s

Private Cloud Preference

PUBLIC AND PRIVATE CLOUDS

• Technology improvements

• Increased public cloud scale

• Increasing comfort

• Decentralized IT • New public-only

services

17 CORPORATE STRATEGY GROUP

Pu

blic

Clo

ud

Eco

no

mic

s

Private Cloud Preference

PUBLIC vs. PRIVATE – PORTFOLIO APPROACH

Midsize Company Example

18 CORPORATE STRATEGY GROUP

SPEED OF ADOPTION

0%

20%

40%

60%

80%

100%

1955 1965 1975 1985 1995

% E

nte

rpri

se A

do

pti

on

Source: Teng, Grover, and Güttle, 2002

19 CORPORATE STRATEGY GROUP

LOWER PRICES WILL DRIVE ADDITIONAL IT INNOVATION

0

250

500

750

1,000

$0

$40

$80

$120

Cost of Storage ($/GB, LHS)

Total Capacity Shipped (Exabytes, RHS)

‘KEEPING LIGHTS ON’ DOMINATES IT BUDGETS….

…BUT CLOUD COST SAVINGS WILL ONLY INCREASE USAGE, DRIVING INNOVATION

53%

36%

11%

Current IT Spending

New AppDevelopment

Existing AppMaintenance

Infrastructure

89%

20 CORPORATE STRATEGY GROUP

LOWER FRICTION WILL ENABLE NEW SCENARIOS

CPU

Traditional IT

CPU 1,000 hrs

X

1 CPU for 1,000hrs

Cloud

1 hr

X

1,000 CPUs for 1hr

CPU CPU

Weeks/months to provision resources

CAPEX

Rigid, disconnected systems

Minutes/hours to provision resources

OPEX

Loosely coupled, flexible, & connected systems

21 CORPORATE STRATEGY GROUP

CASE STUDY: VIRTUALIZATION

Virtualization drove significant net new demand for OS instances

0%

100%

200%

300%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

% o

f O

S In

stan

ces

Traditional Physical Machines Virtual Machines

Net new

Source: Lazard Capital Markets

22 CORPORATE STRATEGY GROUP

CASE STUDY: CONSUMER INTERNET

Source: Wired, 2010

23 CORPORATE STRATEGY GROUP

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

24 CORPORATE STRATEGY GROUP

WE PUBLISHED A WHITEPAPER WITH OUR FINDINGS..

http://ow.ly/38gIf

rolfh@microsoft.com