Cloud Computing can be considered as the Fifth Generation of Computing (after Mainframe, Personal Computer, Client-Server Computing, and the Web). The emergence of cloud services is fundamentally shifting the economics of IT saving firms large sums of money compared to traditional IT deployments. Cloud technology standardizes and pools IT resources and automates many of the maintenance tasks done manually today. Cloud Computing architecture facilitates elastic consumption and “pay-as-you-go” pricing.

Cloud Computing also allows core IT infrastructure to be brought into large data centers that take advantage of significant economies of scale in three areas:

Supply-side savings: Large-scale data centers lower costs per server. Cloud Computing combines the best economic properties of mainframe and client/server computing. The mainframe era was characterized by significant economies of scale due to the high up-front costs of mainframes and the need to hire sophisticated personnel to manage these systems. As the required computing power measured in MIPS (million instructions per second) increased, cost declined rapidly at first, but only large central IT organizations had the resources and the aggregate demand to justify the investment. Due to the high cost, resource utilization was prioritized over end-user agility. Users’ requests were put in a queue and processed only when needed resources were available.

Supply-side savings

With the advent of client/server technology, the minimum unit of purchase was greatly reduced, and the resources became easier to operate and maintain. This modularization significantly lowered the entry barriers to providing IT services, radically improving end-user agility. However, there was a significant utilization tradeoff, resulting in the current state of affairs: datacenters sprawling with servers purchased for whatever needed existed at the time, but running at just 5%-10% utilization.
Cloud computing is not a return to the mainframe era as is sometimes suggested, but in fact offers users economies of scale and efficiency that exceed those of a mainframe, coupled with modularity and agility beyond what client/server technology offered, thus eliminating the tradeoff.

Demand-side aggregation: Aggregating demand for computing, smoothes overall variability and allows server utilization rates to increase. This is depicted in figures given below –
Traditional Enterprise Datacenter

Virtualized Enterprise Datacenter

Cloud Enterprise Datacenter Utilization

Multi-tenancy efficiency: When changing to a multi-tenant application model, increasing the number of tenants (i.e., customers or users) lowers the application management and server cost per tenant.

Economical Impacts of Cloud Computing

The combination of supply-side economies of scale in server capacity (amortizing costs across more servers), demand-side aggregation of workloads (reducing variability), and the multi-tenant application model (amortizing costs across multiple customers) leads to powerful economies of scale. To estimate the magnitude, a cost scaling model which estimates the long term behavior of costs is given below -
Economies of Scale in  the Cloud

Above figure shows the output for a workload that utilizes 10 percent of a traditional server. The model indicates that a 100,000-server datacenter has an 80% lower total cost of ownership (TCO) compared to a 1,000-server datacenter.

Estimated costs of infrastructure

Above figure shows estimated costs of infrastructure for two application servers, two database servers and a load balancer across internal, managed, and cloud deployment models.
From analysis of customer’s data, the approximate breakdown between the infrastructure costs, costs of supporting and maintaining existing applications, and new application development costs has been calculated. The following figure shows the breakdown -

IT  Spending Breakdown:

IT Spending Breakdown

Cloud impacts all three of these areas. The supply-side and demand-side savings impact mostly the infrastructure portion, which comprises over half of spending. Existing application maintenance costs include update and patching labor, end-user support, and license fees paid to vendors. They account for roughly a third of spending and are addressed by the multi-tenancy efficiency factor.

New application development accounts for just over a tenth of spending, even though it is seen as the way for IT to innovate. Therefore, IT leaders generally want to increase spending here. The economical benefits of cloud computing enable spending in new application development by freeing up room in the budget to do so.

Capturing the Cloud Benefits

There are variations of Cloud Computing offerings. Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS). All of these are delivered as a “service” and compete/compliment Traditional IT deployments.
Capturing the Cloud Benefits

Above figure shows that the best way to harness the benefits of cloud is to use SaaS offerings, which have been architected for scale-out and multi-tenancy to capture the full benefits. When writing new applications, Platform as a Service most effectively captures the economic benefits. PaaS offers shared services, advanced management, and automation features that allow developers to focus directly on application logic rather than on engineering their application to scale.

Cloud Computing Has A More Brighter Future Waiting Ahead

The cloud computing market is expected to grow at a double-digit rate. According to experts, the SaaS delivery model of cloud computing will lead the growth story. They believe that emerging countries such as India have the greatest potential for market growth, including opportunities to support outsourcing of Cloud services.
Cloud Computing Market

MarketsandMarkets (a business market research firm) stated in its report of 2010 that global cloud computing market would grow from $37.8 billion in 2010 to $121.1 billion in 2015 at a compound annual growth rate (CAGR) of 26.2% from 2010 to 2015. The report stated that Software as a Service (SaaS) was the largest contributor in the Cloud computing services market, accounting for 73% of the market's revenues in 2010.

By 2012, nearly 85% of net-new software firms coming to market will be built around SaaS service composition and delivery; by 2014, about 65% of new products from established ISVs will be delivered as SaaS services. SaaS-derived revenue will account for nearly 26% of net new growth in the software market in 2014. The above mentioned statements are mentioned in an IDC Report. International Data Corporation, IDC, is the premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications and consumer technology markets.


It has been well explained in this paper that a move to adopt Cloud Computing technology provides significant economic benefits. These benefits accrue to a business in two distinct ways, viz. directly through reduced costs; and indirectly by allowing for increased focus on core business functions and increased spending in newer business projects.

References: Republished from

  1. Dataquest Insight: Many Midsize Businesses Looking Toward 100% Server Virtualization. Gartner, May 8, 2009.
  2. The Economics of Virtualization: Moving Toward an Application-Based Cost Model. IDC, November 2009.
  3. Cloud Computing – By Andy Bechtolsheim. Arista Networks, November 2008.
  4. Internet-Scale Service Efficiency - By James Hamilton. Microsoft Corporation, September 2008.
  5. Cloudonomics: the Economics of Cloud Computing - by Ben Kepes. Diversity Limited, 2011.
  6. Self-Service, Prorated Supercomputing Fun! - By Derek Gottfrid. The New York Times, November 2007.
  7. Cloud computing: Fact versus Fog - By Jocelyn DeGance Graham. Grail Research Cloud Center of Excellence and Cloud research practice, December 2010.
Source sited: My Real Data

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