Cloud Economics Foggy to Many Businesses

Vendors love cloud computing, at least in theory. The cloud computing model offers something many IT companies –
vendors and solution providers alike – have never seen: recurring, predicable and accruing revenue. And, because cloud can be delivered at scale with fewer resources, such services are inherently more profitable.

Cloud economics aren’t lost on businesses. Rather than building and maintaining their own IT systems and applications, cloud computing promises to lower costs by making applications and resources more affordable through fractional recurring fees.

Here’s the problem: Businesses are worried about getting trapped in a service provider’s cloud.

Unlike conventional IT equipment and software, cloud computing requires feeding. If a business stops paying, it loses access to mission-critical resources. And while the monthly, quarterly or annual payments are often less than conventional licenses, the need to continue paying fees indefinitely means there’s no respite from costs.

In other words, cloud computing will always cost more than conventional IT. This is why vendors and service providers love it; they get paid once and always.

Solution providers tell Channelnomics that businesses are asking a lot of questions about cloud computing services, particularly when it comes to hosted infrastructure and platforms. However, applications are increasingly difficult to sell as businesses – especially mid-market and small enterprise – see cloud computing as a trap. They don’t see the economic benefits of an indefinite relationship with a service provider over buying and maintaining on their own.

This phenomenon could be the same thing that’s happening in PC and Windows 8 sales. Analysts forecast conventional PC sales will fall by at least 8 percent in 2013; that follows a similar drop in 2012. Businesses and consumers are not just flocking to tablets and smartphones, they’re extending the service life of their legacy PCs, despite the availability of Microsoft Corp.’s new operating system.

It’s not unusual to see PCs, printers and even servers being pushed well past their planned service lives. Businesses recognize the benefits of features embedded in newer models. However, the benefits and the costs that come with them don’t always outweigh the benefit of maintaining equipment and applications that still have a lot of utility remaining. Moreover, serviceable legacy equipment and applications have the additional benefit of being paid off.

Overcoming this concern is data portability. If you don’t want to continue with a provider, you can take your data and move to another service. In theory, this is correct. However, not all cloud services make data portability easy or convenient. Some cloud services don’t even guarantee data will remain available in the event of discontinuation of service or, worse, if they go out of business.

Some experts argue cloud economics is beneficial because a business only pays for what it uses. Think of it as a DVD or car rental. The unit cost is probably higher than buying something outright, but you’re using it for a specific period, so the cost benefits are in what you don’t pay for. In conventional licensing, you pay regardless of use.

This analogy is apt – except that’s not the way the IT community wants businesses to consume the cloud. Vendors and service providers want extended contracts because it’s in their interest to lock businesses into the recurring payment cycle. Per-sip pricing, though beneficial to the consumer, actually makes cloud computing less predictable and profitable to the suppliers.

None of this is to say cloud computing is a bad model. In many respects, cloud computing comes with numerous productivity and economic benefits that end-users rarely factor in to their ROI calculations. As Nick Carr wrote in his book, “The Big Switch,” no one would build a power plant when there’s an electricity service available. The same is almost true for cloud computing; tens of thousands of businesses are switching to cloud resources to augment their capabilities and reduce their management burdens.

As cloud computing continues to develop as a model, it’s incumbent on the vendor and channel community to come up with better cost-benefit analysis of cloud implementations. Cloud purveyors need to consider the tangible and intangible benefits and provide consumers with assurances that their investments won’t put them at risk to service disruptions.