The cost and paradoxes of the cloud

Marc Andreessen (co-founder and general partner of Andreessen Horowitz)

Credit: JD Lasica

The world’s 50 largest software companies are losing up to $ 100 billion in market value using hosted cloud infrastructure, devaluing what is considered the most efficient and margin-friendly operating model for market players. software game.

According to a lengthy report by Andreessen Horowitz, the venture capitalist in Silicon Valley, the cloud bill for these companies averages US $ 8 billion in total, which means repatriation from the public cloud could become more common to reduce costs.

In the end, this leaves public cloud customers, whose costs have “taken over”, stuck in a paradox: “you’re crazy if you don’t start in the cloud; you’re crazy if you stay on it ”.

Written by Andreessen Horowitz partner Sarah Wang and general partner Martin Casado, the report, which included interviews with experts in the cloud industry, claimed that the repatriation results in a 50% reduction in expenses related to the to the cloud, resulting in a total savings of US $ 4 billion in recovered benefits.

“While an estimated $ 4 billion in net savings alone is staggering, this figure becomes even more telling when translated into unlocked market capitalization,” the report said.

“Since all businesses are conceptually valued as the present value of their future cash flows, achieving these aggregate annual net savings results in market capitalization creation well in excess of $ 4 billion.

Credit: Andreessen Horowitz

For example, Dropbox has saved nearly $ 75 million over two years by moving most of its workloads from the public cloud to “lower cost, bespoke infrastructure in colocation facilities.”

Once moved to facilities that it directly leased and operated, Dropbox’s gross margins fell from 33% to 67% from 2015 to 2017.

In the report, the authors and cloud experts came up with the “formula”: repatriation has between one-third and one-half the cost of running equivalent workloads in the cloud.

In terms of total cost of income (COR), the report claimed that contractually incurred expenses averaged 50 percent of COR, making the case for repatriation more “meaningful”.

While the venture capital firm’s analysis focused on the top 50 software companies in the world, the report also pointed out that “for the wider universe of public software companies and the consumer Internet using cloud infrastructure, that number is probably much higher. ”

Meanwhile, Wang and Casado estimated that an additional gross profit of US $ 4 billion can be estimated at an additional US $ 100 billion in market capitalization among these 50 companies alone.

Credit: Andreessen Horowitz

However, the authors noted that “rewriting” a company’s public cloud architecture to a more hybrid model can seem “so impractical as it is impossible” and requires the establishment of a dedicated team. solid infrastructure.

“We’re not arguing for repatriation one way or the other; rather, we are emphasizing that infrastructure spending should be a first-class measure, ”the report says. “What do we mean by that? That companies need to optimize early on, often and sometimes outside the cloud as well. When you are building a large-scale business, there is little room for religious dogma.”

In a “dramatic irony,” the authors also noted that the oligopoly of Amazon Web Services (AWS), Microsoft Azure, and Google Cloud should not be shaken.

Since the trio all run their own infrastructure, they allow for ever-greater reinvestment in product and talent while supporting their own stock price, according to the report.

As such, the oligopoly will continue to benefit from its 30 percent margins and a combined market capitalization of US $ 3 trillion.

However, for the rest of the industry, the venture capitalist outlined five steps to help clients lower the cost of burgeoning cloud consumption. The first is to tie cloud cost metrics with basic performance and reliability from the earliest stages of a business.

Other areas included inducing engineers as well as sales staff to reduce a company’s consumption costs, while also making incremental optimization of infrastructure decisions a key goal.

The fourth area is to educate system architects of the repatriation potential early on before cloud costs start to exceed revenues.

And finally, argued Wang and Casado, there is no reason why companies should not gradually repatriate parts of companies in a hybrid fashion.

“And so, with hundreds of billions of dollars at stake, this paradox will likely resolve itself one way or another: either public clouds will start to lose headroom, or they will start to forgo workloads. “, concludes the report. .

“Regardless of the scenario, perhaps the biggest infrastructure opportunity right now lies somewhere between the cloud hardware and the unoptimized code running on it. ”

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