Things are changing fast in the world of Cloud Computing, however one question remains the same. Will it save me money and how much? To follow up on a previous post on Cloud Economics 101 Part 1, I looked at a fairly simple example of 5 Servers for a dev/test environment and identified the incremental costs of buying 5 servers and running them on premise or a Colo and then compared that to Amazon EC2. The analysis did not include many variables such as real estate costs and labor savings which may or may not apply to the particular situation. The results indicated that a Premise based deployment could provide the lowest “incremental” cost when compared to EC2 if the servers were running continuously. On the other hand EC2 provided significant savings for short term workloads with no upfront costs.

Purchase – on Premise
$ 15,000
Quad-Core Servers ( 5 x 3,000 each  )
$ 750
1/2 Rack + Gigabit Switch
$ 15,750
Total Hardware cost
$ 5,800
Annual amortized cost, 5% over 3 years
$ 0
Assuming no incremental real estate cost   
$ 2,000
Annual power & AC cost
$ 7,800
Total annual cost on premise
Purchase – at Colo
$  8,000
Colo fee’s; 1/2 Rack + power + bandwidth    
$  5,800
Annual amortized cost
$ 13,800
Total annual cost at Colo
$ 35,040
24x7x365x5 Amazon EC2 ( $.80 per high CPU Server instance hour )
$  8,320
40 hours x 52 weeks
$    688
40 hours x 4.3 weeks

What has changed recently at Amazon is a new pricing model that provides the option for “Reserved Instances” which includes an upfront fee ( 1 year or 3 year term ) and a reduced per hour charge. The analysis below reflects the new pricing model applied to the same 5 server scenario as above. As indicated the new model results in a significant savings compared to EC2 standard pricing; 31% for the 1 year term and 48% for the 3 year term assuming the servers are running 24/7. However, when compared to the 40 hour per week scenario the cost at $16,146 ( or $10,229 3 year ) is higher than the EC2 Standard price of $8,320 or the Premise cost of $7,800.

Annual $ Reserved Pricing at EC2
24,162 24x365x5 ( $.80 high CPU ) 1 Year Reservered, $2,600×5 Upfront amortized at 5% 
18,245 24x365x5 ( $.80 High CPU ) 3 Year Reservered, $4,000×5 Upfront amortized at 5%
16,146 40 hours x 52 x 5 ( $.80 High CPU ) 1 Year
10,229 40 hours x 52 x 5 ( $.80 High CPU ) 3 Year

So will the Cloud save money? the answer remains the same … it depends. The new ” Reserved Instance” pricing model provides substantial savings over standard pricing when used continuously but the standard pricing still is more effective for short time periods such as a 40 hour week load. As noted in the earlier posts there are many other variable cost savings by putting workloads in the cloud such as real estate costs, facility upgrades plus the intangible but real benefit of reduced time to develop/test/deploy.

The “Reserved Instance” pricing will also impact the variable workload analyzed in Cloud Economics Part 2 – Premise Plus Cloud scenario, this should provide more content for an upcoming post.    

Cloud Economics 101 Part 1 – Premise vs Cloud vs Colo
Cloud Economics 101 Part 2 – Premise Plus Cloud
Cloud Economics 101 Part 4 – Amazon EC2 vs Terremark vCloud
Cloud Economics 101 Part 5 – Amazon EC2 Micro AMI