Two Andreessen Horowitz analysts take on the industry mantra that public cloud is organizations’ best financial option.
The capex argument for moving to cloud computing is virtually dead.
And while cloud does deliver on its money-saving promises, it only does so early on in a company’s journey.
Later, the pressure cloud computing “puts on margins can start to outweigh the benefits.”
All that comes from two experts at Andreessen Horowitz — the venture capital firm co-founded by two of cloud’s early pioneers. In a blog, Sarah Wang and Martin Casado make a series of – dare we say, compelling – points against the industry’s all-cloud push. Indeed, Wang and Casado rely largely on financial data to make their case.
But let’s back up.
The cloud sector has needed time to mature before anyone could fully understand the economic implications. That’s happening at last. And the results are not quite as sunny as the public cloud providers want people to think, according to Wang and Casado.
Yes, they say, shifting from on-premises infrastructure to the cloud makes sense as an organization gets off the ground. Yet, as that firm scales and growth starts to slow, things change. The long-term cost implications of cloud computing balloon, Wang and Casado say, providing numbers to solidify their stance.
At that point, though, organizations can’t just shift infrastructure. They’re locked in — a situation that can look an awful lot like the single-vendor dependence problems of yore. Regaining infrastructure freedom takes time and money, “and is often considered a non-starter,” per Wang and Casado.
Here’s perhaps the most intriguing part, one that channel partners may want to bear in mind as they work with customers: “[W]hen evaluated relative to the scale of potentially lost market capitalization – which we present in this post – the calculus changes. As growth (often) slows with scale, near-term efficiency becomes an increasingly key determinant of value in public markets,” Wang and Casado write. “The excess cost of cloud weighs heavily on market cap by driving lower profit margins.” Market capitalization, they say, “is being suppressed by the cloud.”
‘$100B of Market Value Is Being Lost’
Cloud computing is great, Wang and Casado say. However, its broader consequences are significant.
Here’s how they reach their assertions:
“We show (using relatively conservative assumptions!) that across 50 of the top public software companies currently utilizing cloud infrastructure, an estimated $100B of market value is being lost among them due to cloud impact on margins — relative to running the infrastructure themselves. And while we focus on software companies in our analysis, the impact of the cloud is by no means limited to software. Extending this analysis to the broader universe of scale public companies that stands to benefit from related savings, we estimate that the total impact is potentially greater than $500B.”
Wang and Casado are not pressing for a full switch to private cloud computing. Rather, they’re seeking to show just how much …