The cost and paradoxes of the cloud
The world’s 50 largest software companies are losing up to $ 100 billion in market value using hosted cloud infrastructure, devaluing what is considered the most efficient, margin-friendly operating model for market players. software game.
According to a lengthy report by Andreessen Horowitz, the venture capitalist in Silicon Valley, the cloud bill for these companies averages US $ 8 billion in total, which means repatriation from the public cloud may become more. current to reduce costs.
Ultimately, this leaves public cloud customers, whose costs have “taken the lead”, stuck in a paradox: “You’re crazy if you don’t start in the cloud; you’re crazy if you stay on it ”.
Written by Sarah Wang, partner of Andreessen Horowitz, and general partner Martin Casado, the report, which included interviews with experts in the cloud industry, claimed the repatriation resulted in a 50% reduction in cloud spending. , which translated into a total savings of $ 4 billion in recovered profits.
“While an estimated $ 4 billion in net savings alone is staggering, that number becomes even more telling when translated into unlocked market capitalization,” the report said.
“Since all companies are conceptually valued as the present value of their future cash flows, achieving these total net annual savings translates into market capitalization creation well in excess of US $ 4 billion.”
For example, Dropbox saved nearly $ 75 million over two years by moving most of their workloads from the public cloud to a “low-cost, tailor-made infrastructure in colocation facilities.”
When moved to facilities it leased and operated directly, Dropbox’s gross margins fell from 33% to 67% from 2015 to 2017.
In the report, the authors and cloud experts came up with the “formula”: repatriation is one-third to one-half the cost of running equivalent workloads in the cloud.
Regarding Total Cost of Revenue (COR), the report claimed that contractually incurred expenses averaged 50% of COR, making the case for repatriation more “meaningful”.
As the VC firm’s analysis focused on the top 50 software companies in the world, the report also pointed out that “for the wider universe of public software companies and the consumer Internet using a cloud infrastructure, this number is probably much higher ”.
Meanwhile, Wang and Casado estimated that an additional gross margin of US $ 4 billion can be estimated at an additional US $ 100 billion in market capitalization among these 50 companies alone.
However, the authors noted that “rewriting” a company’s public cloud architecture to a more hybrid model can seem “so impractical as to be impossible” and requires the establishment of a dedicated team. solid infrastructure.
“We’re not arguing for repatriation one way or another; rather, we stress that infrastructure spending should be a top-notch measure, ”the report says. “What do we mean by this? Businesses need to optimize early, often, and sometimes outside the cloud as well. When you’re building a large-scale business, there’s little room for religious dogma.
In a “dramatic irony,” the authors also noted that the oligopoly of Amazon Web Services (AWS), Microsoft Azure, and Google Cloud is unlikely to be shaken.
Since the trio all manage their own infrastructure, it allows for ever-greater reinvestment in products and talent while supporting their own stock price, according to the report.
As such, the oligopoly will continue to benefit from its 30% margins and a combined market capitalization of US $ 3 trillion.
However, for the rest of the industry, the venture capitalist outlined five steps to help clients lower the cost of burgeoning cloud consumption. The first is to have cloud cost metrics associated with basic performance and reliability in the early stages of a business.
Other areas included inducing engineers as well as sales staff to reduce a company’s consumption costs, while making incremental optimization of infrastructure decisions a key goal.
The fourth area is to educate system architects about the repatriation potential before cloud costs start to exceed revenues.
Finally, according to Wang and Casado, there is no reason for companies not to gradually repatriate some of the companies in a hybrid way.
“And so, with hundreds of billions of dollars at stake, this paradox will likely resolve one way or another: either public clouds will start to give up margin, or they will start to give up workloads,” concludes the report. .
“Whatever the scenario, perhaps the biggest infrastructure opportunity right now lies somewhere between cloud hardware and the unoptimized code running on it.”
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