The 10 Laws of Cloudonomics

Here's what makes public utility cloud services different—and how they can give you a sustainable strategic advantage

by Joe Weinman

If your enterprise has access to the same things—virtualization, automation, performance management, ITIL, skilled IT resources, etc.—as cloud service providers, would clouds provide any real and sustainable benefit?

Public utility cloud services differ from traditional data center environments—and private enterprise clouds—in three fundamental ways. First, they provide true on-demand services, by multiplexing demand from numerous enterprises into a common pool of dynamically allocated resources. Second, large cloud providers operate at a scale much greater than even the largest private enterprises. Third, while enterprise data centers are naturally driven to reduce costs via consolidation and concentration, clouds—whether content, application, or infrastructure—benefit from dispersion. These three key differences in turn enable the sustainable strategic competitive advantage of clouds through what I'll call the 10 Laws of Cloudonomics.

Cloudonomics Law No. 1 Utility services cost less even though they cost more.

An on-demand service provider typically charges a utility premium—a higher cost-per-unit time for a resource than if it were owned, financed, or leased. However, although utilities cost more when they are used, they cost nothing when they are not. Consequently, customers save money by replacing fixed infrastructure with clouds when workloads are spiky, specifically when the peak-to-average ratio is greater than the utility premium.

Cloudonomics Law No. 2 On-demand trumps forecasting.

The ability to provision capacity rapidly means that any unexpected demand can be serviced, and the revenue associated with it captured. The ability to rapidly de-provision capacity means that companies don't need to pay good money for nonproductive assets. Forecasting is often wrong, especially for black swans, so the ability to react instantaneously means higher revenues and lower costs.

Cloudonomics Law No. 3 The peak of the sum is never greater than the sum of the peaks.

Enterprises deploy capacity to handle their peak demands: A tax firm worries about Apr. 15, a retailer about Black Friday, an online sports broadcaster about Super Sunday. Under this strategy, the total capacity deployed is the sum of these individual peaks. However, since clouds can reallocate resources across many enterprises with different peak periods, a cloud needs to deploy less capacity.

Cloudonomics Law No. 4 Aggregate demand is smoother than individual.

Aggregating demand from multiple customers tends to smooth out variation. Specifically, the "coefficient of variation" of a sum of random variables is always less than or equal to that of any of the individual variables. Therefore, clouds get higher utilization, enabling better economics.

Cloudonomics Law No. 5 Average unit costs are reduced by distributing fixed costs over more units of output.

While large enterprises benefit from economies of scale, larger cloud service providers can benefit from even greater economies of scale, such as volume purchasing, network bandwidth, operations, administration, and maintenance tooling.