Cloudonomics: The Business Value of Cloud Computing, + Website

Cost of Excess Capacity

As we initially explored in Chapter 9, there are costs to excess capacity as well as insufficient capacity. There are major economic costs to excess capacity, such as the leasing, loan servicing or the opportunity cost of the capital that is employed, the administration of the assets, and any additional costs required due to the excess capacity, such as power and floor space.

Suppose that we lease or buy $2 million worth of servers when we only need $1 million worth. The opportunity cost of that decision is the income that could have been earned using that $1 million to do something else. We could put it in a checking account and earn interest. We could buy back our stock, driving the share price higher. We could invest in a new business or a new product. At the end of several years, we might have turned that million into $2 million or $5 million or $50 million.

Even if we did none of that and just kept the $1 million under the corporate mattress, at the end of three to five years we still would have the $1 million (less any losses in purchasing power due to inflation). If we had bought wine—Bordeaux first growths, say—and kept it cellared properly in its original wood cases, the wine might have appreciated in value. However, the servers, storage, and switches—even if cellared properly and still in their original boxes—would have depreciated in value. Given the rate of technology evolution, the residual value of high-tech equipment after three years might ...