The Economics of Cloud Computing: If It Seems Too Good to Be True, It Probably Is

September 30, 2013

One of the hosts of a popular Sirius XM radio talk show was recently in the market to lease a car, and a few weeks ago, he shared an interesting story. In his research, he came across an offer he came across that seemed "too good to be true": Lease a new Nissan Sentra with no money due at signing on a 24-month lease for $59 per month. The car would as "base" as a base model could be, but a reliable car that can be driven safely from Point A to Point B doesn't need fancy "upgrades" like power windows or an automatic transmission. Is it possible to lease new car for zero down and $59 per month? What's the catch?

After sifting through all of the paperwork, the host admitted the offer was technically legitimate: He could lease a new Nissan Sentra for $0 down and $59 per month for two years. Unfortunately, he also found that "lease" is just about the extent of what he could do with it for $59 per month. The fine print revealed that the yearly mileage allowance was 0 (zero) — he'd pay a significant per-mile rate for every mile he drove the car.

Let's say the mileage on the Sentra was charged at $0.15 per mile and that the car would be driven a very-conservative 5,000 miles per year. At the end of the two-year lease, the 10,000 miles on the car would amount to a $1,500 mileage charge. Breaking that cost out across the 24 months of the lease, the effective monthly payment would be around $121, twice the $59/mo advertised lease price. Even for a car that would be used sparingly, the numbers didn't add up, so the host wound up leasing a nicer car (that included a non-zero mileage allowance) for the same monthly cost.

The "zero-down, $59/mo" Sentra lease would be a fantastic deal for a person who wants the peace of mind of having a car available for emergency situations only, but for drivers who put the national average of 15,000 miles per year, the economic benefit of such a low lease rate is completely nullified by the mileage cost. If you were in the market to lease a new car, would you choose that Sentra deal?

At this point, you might be wondering why this story found its way onto the SoftLayer Blog, and if that's the case, you don't see the connection: Most cloud computing providers sell cloud servers like that car lease.

The "on demand" and "pay for what you use" aspects of cloud computing make it easy for providers to offer cloud servers exclusively as short-term utilities: "Use this cloud server for a couple of days (or hours) and return it to us. We'll just charge you for what you use." From a buyer's perspective, this approach is easy to justify because it limits the possibility of excess capacity — paying for something you're not using. While that structure is effective (and inexpensive) for customers who sporadically spin up virtual server instances and turn them down quickly, for the average customer looking to host a website or application that won't be turned off in a given month, it's a different story.

Instead of discussing the costs in theoretical terms, let's look at a real world example: One of our competitors offers an entry-level Linux cloud server for just over $15 per month (based on a 730-hour month). When you compare that offer to SoftLayer's least expensive monthly virtual server instance (@ $50/mo), you might think, "OMG! SoftLayer is more than three times as expensive!"

But then you remember that you actually want to use your server.

You see, like the "zero down, $59/mo" car lease that doesn't include any mileage, the $15/mo cloud server doesn't include any bandwidth. As soon as you "drive your server off the lot" and start using it, that "fantastic" rate starts becoming less and less fantastic. In this case, outbound bandwidth for this competitor's cloud server starts at $0.12/GB and is applied to the server's first outbound gigabyte (and every subsequent gigabyte in that month). If your server sends 300GB of data outbound every month, you pay $36 in bandwidth charges (for a combined monthly total of $51). If your server uses 1TB of outbound bandwidth in a given month, you end up paying $135 for that "$15/mo" server.

Cloud servers at SoftLayer are designed to be "driven." Every monthly virtual server instance from SoftLayer includes 1TB of outbound bandwidth at no additional cost, so if your cloud server sends 1TB of outbound bandwidth, your total charge for the month is $50. The "$15/mo v. $50/mo" comparison becomes "$135/mo v. $50/mo" when we realize that these cloud servers don't just sit in the garage. This illustration shows how the costs compare between the two offerings with monthly bandwidth usage up to 1.3TB*:

Cloud Cost v Bandwidth

*The graphic extends to 1.3TB to show how SoftLayer's $0.10/GB charge for bandwidth over the initial 1TB allotment compares with the competitor's $0.12/GB charge.

Most cloud hosting providers sell these "zero down, $59/mo car leases" and encourage you to window-shop for the lowest monthly price based on number of cores, RAM and disk space. You find the lowest price and mentally justify the cost-per-GB bandwidth charge you receive at the end of the month because you know that you're getting value from the traffic that used that bandwidth. But you'd be better off getting a more powerful server that includes a bandwidth allotment.

As a buyer, it's important that you make your buying decisions based on your specific use case. Are you going to spin up and spin down instances throughout the month or are you looking for a cloud server that is going to stay online the entire month? From there, you should estimate your bandwidth usage to get an idea of the actual monthly cost you can expect for a given cloud server. If you don't expect to use 300GB of outbound bandwidth in a given month, your usage might be best suited for that competitor's offering. But then again, it's probably worth mentioning that that SoftLayer's base virtual server instance has twice the RAM, more disk space and higher-throughput network connections than the competitor's offering we compared against. Oh yeah, and all those other cloud differentiators.

-@khazard

Comments

November 14th, 2013 at 11:04am

'As a buyer, it’s important that you make your buying decisions based on your specific use case'.

This is great advice and this article explains the market really well.

Investigate your personal circumstances and create your own objectives for any outsourcing project and then match the provider to the achievement of these objectives.

Cost must match what you need delivered.

December 24th, 2013 at 3:44pm

Very well written! I must admit I myself, at first, was reluctant to delve into cloud based servers because of these sorts of pricing schemes, but I found SoftLayer's pricing to make solid business sense for several of our needs and have thus implemented it. Thanks guys!

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Comments

November 14th, 2013 at 11:04am

'As a buyer, it’s important that you make your buying decisions based on your specific use case'.

This is great advice and this article explains the market really well.

Investigate your personal circumstances and create your own objectives for any outsourcing project and then match the provider to the achievement of these objectives.

Cost must match what you need delivered.

December 24th, 2013 at 3:44pm

Very well written! I must admit I myself, at first, was reluctant to delve into cloud based servers because of these sorts of pricing schemes, but I found SoftLayer's pricing to make solid business sense for several of our needs and have thus implemented it. Thanks guys!

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