Cloud Economics: Is it still cheaper in-house?

Add up the server processing, storage, and network traffic charges of the world's cloud computing services and you are left with a lingering question: What if it is still cheaper to do it in-house?

Following yesterday's analysis of the prices offered by Amazon's EC2, Tata's InstaCompute and services from Windows Azure and VMware-backed Terremark, we felt the question warranted being asked of two of Australia's enterprise IT thought leaders.

IBRS technology advisor, Dr Kevin McIsaac, believes that public cloud provider service levels - excluding managed services hosted at home by the likes of Melbourne IT, Optus and Telstra - are not yet up to the task of managing business-critical applications. 

"These are basic services which do not guarantee robust service levels, and are best suited for non-critical, workloads with highly variable capacity demands, like test and dev or large data manipulation," he told iTnews. 

According to McIsaac, businesses can for the most part deliver computing cheaper on their own. 

Using Amazon's highest end "High-Memory Quadruple Extra Large Instance" (running Unix/Linux) would, according to McIsaac's estimates, cost $69,120 over a four-year period to run -- assuming 100 percent utilisation. 

Although the cost would fall if it were an Amazon "reserved" instance, the on-demand pricing could equate to double the cost of running a comparable system in-house, McIsaac said.

"If you went to Dell you can get a a 2x4-core CPU system, with this much memory [68.4GB] and internal disk [1.69 TB] for AU$10,000 to AU$15,000," he said. 

"Over four years the power cost and data centre space might be another AU$20,000. VMware [licensing] would be a big cost, but if this is for a database, you might not bother. So if you already run some infrastructure you could add this server for an incremental four year cost of AU$35,000."

Other costs such as staffing, disaster and backup facilities would already be in place for existing operations and would not change significantly, he said. 

"The bottom line is, if you need the server for most of that four years, it is probably cheaper to just buy and rack up a server. On the other hand, if you are only using it for one to two years, EC2 might be a great solution," he said.

"IT organisations should look for specific cases where the public cloud has a natural competitive advantage: highly variable demand, organisations that lack sufficient scale or new projects with very different infrastructure requirements."

Queensland-based enterprise IT analyst Sam Higgins countered that in-house service levels are often worse than what the on-demand cloud provider can deliver. 

"Cloud services are certainly fit for the enterprise from a strategic perspective - keeping in mind that many organisations don't house their servers in appropriately secure environments, with little to no disaster recovery," said Sam Higgins, director for technology for analyst firm Longhaus. 

But Higgins conceded that cloud providers did have service shortcomings, in particular when it came to management. 

"Take Amazon for example, they have really only added management capability in the last 12-18 months with features such as Amazon Virtual Private Cloud (Amazon VPC)," he said. "Most entry level IaaS [Infrastructure as a service], even if built on vCloud (VMware) or other robust platforms often leave the true management of the environment on the buyer side."

With regards to the economics, Higgins expressed caution at comparing the cost of in-house provision with "fully utilised" services on the public cloud.

While he agreed that IaaS was best suited to short term requirements such as specialised marketing campaigns, test and dev or new system rollouts, comparing on-demand at full utilisation was a "dangerous" way to make the comparison, he said.

"You only get charged for the resources you use on a very small metric, like hourly," he said. "If the offering is truly cloud, which Amazon certainly is, then you're unlikely to ever pay the type of dollars you're suggesting. Why? Because you'll never actually run a server at full memory, storage and capacity ever hour of every day."

An adequate estimate would be 50 percent, according to Higgins, and on this basis on-demand would be a lot cheaper than running five servers for three years. He estimated the in-house cost (at $4,000 per server) to be around $17,000. 

"Take an entry level Amazon box at Windows $0.12 and Linux $0.095 (from Amazon's Singapore data centre), then you'll get an annual cost of $1051.20 and $832.20 respectively. Compared with $17,000 this is pretty compelling." 

"Even if you have to add the additional management overhead and still have warm bodies managing the environment, it would take some effort to chew through almost $14,000 of savings per server."