Cloudonomics: The Business Value of Cloud Computing, + Website

Capital Expenditures versus Operating Expenses

Some have argued that one of the benefits of the cloud model is that companies can avoid large capital expenditures (capex) and translate them into operating expenses (opex) using the cloud. As shown in Exhibit 10.2, the choice appears to be that between Exhibit 10.2(a), a large up-front capital investment, and Exhibit 10.2(b), a more manageable payment stream.

EXHIBIT 10.2 Apparent Capex versus Opex Decision

Healthy companies, some of which are today sitting on enormous piles of cash, don’t necessarily consider capital expenditures bad and operating expenses good; rather, such expenses are among a variety of viable ways of financing operations. Choosing one versus the other involves trading off considerations such as the weighted average cost of capital, tax implications, covenants, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), and assorted budgetary targets. There are additional subtleties: IT strategist Chris Potts advised that “if an IT plan is part of a major corporate project like building a big factory, trying to expense IT could affect depreciation schedules for the whole plan.”6 In such cases, migrating from capex to opex might have larger—and negative—repercussions.

Moreover, as seen in Exhibit 10.3, a company doesn’t need to have a cloud computing service provider handle the conversion of capex ...