Bezos’s law signals it’s time to ditch the data center

Wherever you stand on the debate over which cloud giant will reign supreme, it’s clear that the economic forces shaping the market are evolving quickly. After nearly three decades helping companies move their enterprise applications into the modern era, whether to new servers, operating systems or clouds, I’ve seen the cycle before: innovation leads to rapid expansion, which leads to consolidation, shake-out and more innovation. We’ve been down this road before.

Now comes new cloud computing data based on Total Cost of Infrastructure (TCOI), proving cloud providers are innovating and reducing costs in areas beyond hardware. The result is a more compelling case for cloud as a far cheaper platform than a build-your-own data center. Further, the economic gap that favors the cloud provider platform will only widen over time.

In many ways, cloud computing is bringing to the enterprise world what Henry Ford brought for cars. Ford developed and designed a method for manufacturing that steadily reduced the cost of manufacturing the Model T, thus lowering the price of his car. The result was a decline in the number of US auto manufacturers from more than 200 in the 1920s to just eight in 1940. This astounding 96 percent reduction in manufacturers over 20 years foreshadowed what could happen to enterprises running their own data centers in the not too distant future.

Previously, I posited that the future of cloud computing is the availability of more computing power at a much lower cost. I termed this “Bezos’s law,” and defined it as the observation that, over the history of cloud, a unit of computing power price is reduced by 50 percent approximately every three years.

Bezos’s law measures the cost of a given unit of cloud computing over a period of time, as compared to Moore’s Law, which we know is “the number of transistors on integrated circuits over a period of time.” While Moore’s law measures the rate of change of CPU, a small fraction of the cost of a data center or cloud, Bezos’s law is a measure of the rate of change of Total Cost of Infrastructure Ownership (TCIO).

Why is TCIO so relevant?

The team from IBM SoftLayer commissioned McKinsey to do a study around TCIO.  The comprehensive analysis highlighted the following about total costs:

Slide courtesy of IBM.

Slide courtesy of IBM.

When considering the rate of Bezos’s law in light of IBM’s analysis, it is clear cloud providers are innovating and reducing cost in areas beyond hardware.

A chart of the percentage of monthly cost from Amazon’s James Hamilton’s blog about overall data center costs — which does not include cost of building a data center or operational labor — points to power as 31 percent of the monthly costs. And that was back in 2010.

There have been many articles written about power usage efficiency (PUE) to build clouds at scale from FaceBook and Google. Enterprises can only keep pace with the TCIO of cloud providers if they innovate and drive cost out of data center operation beyond reductions in hardware.

But a glimpse at data center efficiency indicates that enterprises are not improving from a PUE metric and have a much higher (1.7 self-reported) PUE than cloud providers. People in an enterprise don’t lose their jobs if the data center is not that efficient. Cloud providers not only lose their jobs but put the business in jeopardy if the resulting product is not power efficient.

There are obvious drivers ensuring the compounding trend line as described in Bezos’s law will continue for many decades.

  • Scale: Every day, Amazon, Google, IBM and Microsoft are adding huge amounts of capacity capable of running most Fortune 1,000 companies.
  • Innovation: The cloud market is competitive with innovative approaches and services being brought to market quickly.
  • Competition and price transparency: While the base IaaS service varies among providers, they are close enough for customers to easily compare offerings.

Let’s assume that on average the Fortune 5000 each have seven data centers for a total of 35,000. Bezos’s law will drive (think Henry Ford’s Model T) a similar titanic shift away from data centers to the cloud, which will result in 90 percent reduction (approximately 30,000) in enterprise owned and operated data centers by 2030. Given Gartner’s prognostication that public cloud services will hit $131B by 2017, this seems obvious. (There is likely to be new businesses dedicated to repurposing data centers to retirement homes or new fangled dance clubs.)

Just as people first thought automobiles were toys, early critics said the cloud would only be for limited use — test/development environments and spiky workloads. Now consensus is that the cloud can be used for almost all applications. Early cars were expensive and unreliable, but the evidence revealed a compelling reduction in TCIO that put the whole country on wheels. It may be the end of the road for the data center, but the economic forces shaping the cloud signal it’s the beginning of a better idea for the enterprise.

Greg O’Connor is CEO of AppZero.