97 Things Every Cloud Engineer Should Know

Chapter 69. How Economies of Scale Work in the Cloud

Jon Moore

Chief Software Architect

Are you familiar with the economic theory of experience curves (also known as learning curves)?¹ For cloud computing, this theory explains not only why it makes sense to outsource new datacenter costs to public cloud providers, but also why it may make sense for you to stop operating a datacenter at all.

Experience curves were formalized by the Boston Consulting Group (BCG) and describe how production costs tend to fall in a predictable fashion as the number of units produced increases. Namely, the more you produce, the better/quicker/cheaper you get at it. This is the essence of economy of scale. These curves are usually formalized as a percentage cost: for example, a 75% experience curve means that with each doubling of production, the marginal cost of producing the last unit drops by 25%. So, for example, one unit might cost $100, but the second costs only $75. The fourth costs $56, the eighth $42, etc. Experience curves show a diminishing rate of return.

In the cloud computing case, we want to know the marginal cost of deploying and maintaining servers. While we don’t know the actual learning rate, typical experience curves fall in the 75%–90% range. So let’s assume datacenter server deployment follows a curve in that range as well.

Suppose you can rent a Linux virtual machine from your ...