Cloudonomics: The Business Value of Cloud Computing, + Website

Characterizing Relative Costs and Workload Variability

To decide which approach to use, we need to characterize a few main parameters. The first is the unit cost of an on-demand, pay-per-use cloud resource relative to the unit cost of a dedicated resource, which may be owned and incur a cost for depreciation, may be leased and incur a monthly fee, or may be financed, and represent an ongoing principal plus interest fee to the bank. We will define a “utility premium,” U, as the ratio of the cloud unit cost to the do-it-yourself unit cost. In an example where an owned car costs $10/day and a rental costs $50/day, the premium for the rental car is U = 5, since the rental car costs five times as much.

If U = 1, the cloud costs the same as ownership. It is like getting the rental car for $10 per day. And if U < 1, the cloud is cheaper, which certainly can happen as well. The utility premium, U, may vary over time, due both to improvements or one-time charges in your own operations and to price reductions or increases that the cloud provider may implement. However, here we adopt the convenient fiction that U is constant. We assume that the cost of the “ownership” model for a resource for a unit time is cr and therefore that the cost of the utility pricing in the cloud is U × cr. For a given amount of time, T, the total price incurred for an owned resource is cr × T, and the total price for that in the cloud is U × cr × T. These formulas are just a way of formalizing what we’ve already ...