6 Half-Truths About the Cloud

Is there any subject in IT today with more promise — or more confusion — than cloud computing?  Here are six commonly held views that, while not wrong, are just not entirely accurate:

1. Economies of scale are the key to cloud benefits

A number of industry analysts have argued that public infrastructure clouds generate value for customers through unit cost efficiencies derived from massive web-scale operations. True, large service providers can achieve economies of scale through volume discounts, experience curve effects, and consolidate operations at a scale that minimizes unit costs.

However, enterprises and cloud providers build data centers out of the same components and similar tooling, purchased at similar price points. While some economies of scale may exist, a greater role may be played by the statistics of scale: By aggregating uncorrelated demand from multiple customers, service providers can reduce variation and maximize utilization. After all, a retailer’s peak after Thanksgiving is different than a tax preparer’s peak in early April.

2. All IT will move to the cloud

Nick Carr, in “The Big Switch,” highlights the parallels between electricity and IT. When electric power was first adopted by industry, companies owned their own generators. This approach rapidly shifted, due to cost-effective AC power generation and distribution technologies and today, of course, almost everybody buys their power from a utility. Conclusion: the same will happen to IT.

True, cloud-based IT services offer a number of advantages.  And no one can argue with results: A number of enterprises have eschewed in-house deployment of, say, CRM or messaging because it’s just not worth the upfront licensing costs, upgrade and patch hassles, or the effort to keep the environment operational.

However, web-scale cloud infrastructure is largely built out of the same servers and storage available to enterprises.  This differs from electricity, where, say, a desktop nuclear power plant or personal hydroelectric dam with roughly equivalent cost per kilowatt-hour does not (yet) exist.  An economic optimum occurs for infrastructure when owned resources are balanced with cloud resources in a proportion that depends on the utility price premium and the peak-to-average ratio of demand.  Consequently, perhaps housing is a better parallel than electricity: It’s best to use a thoughtful mix of your own resources and hotel rooms.

3. Clouds generate value by replacing capital expenditures with operating expenditures

True, avoiding a large capital outlay may make a difference to two teens with their Mom’s credit card and an idea for an innovative Facebook application.  And capital expenditures imply an investment in fixed capacity, whereas cloud services offer the promise of agility.

However, for solvent enterprises, using capital vs. cash flow is a decision that won’t impact the key metric for any well-run firm: Return on Invested Capital. The point is that capital expenditures are not evil contraband and operating expenses aren’t manna from heaven; choosing between them is a financial decision to be addressed by the CFO.

4. Private clouds are as effective as public clouds

True, a “private cloud” can use dynamic resource allocation, virtualization, chargeback mechanisms, autonomic provisioning and performance tuning, just like a public cloud. And sharing resources across business units is certainly better than siloing them. Also, the ability to seamlessly cross public/private cloud boundaries based on real-time demand can create real business value via cloudbursting.

However, with a “private cloud,” an enterprise still must expend capital in fixed quantities (or, equivalently, commit to fixed lease payments) regardless of utilization, removing the key benefit of nearly unbounded scalability without prior investment or long-term commitment, a key mechanism of value generation by service provider clouds. I’ve defined a cloud to be a CLOUD: a Common Location-independent Online Utility service, available on-Demand.  Not only do some IT and telecom services fit this definition, so do electric utilities, rental car chains, and hotel franchises.  By analogy then, a “private cloud” makes as much sense as would be something like a “personal hotel.”  This is more than semantics — it’s economics.

5. Cloud = virtualization

True, cloud services benefit from virtualization, and hybrid architectures that seamlessly integrate in-house capacity with cloud services will enable cloudbursting to reduce cost while enhancing flexibility.

However, virtualization is orthogonal to cloud implementation. Enterprises can leverage server and storage virtualization in a fully owned enterprise environment, or cloud service providers can leverage virtualization in a shared services environment. The use of virtualization, then, is unrelated to whether the environment is a cloud or not.

6. Clouds are greener

True, they may reduce total power consumption and therefore carbon footprint.

However, this is only because multi-tenancy and aggregation of uncorrelated demand go one step beyond virtualization, reducing total resource requirements through statistical multiplexing. Fewer resources imply less manufacturing, and less electricity consumption for power and cooling.

Joe Weinman is Strategy and Business Development V-P for AT&T Business Solutions.