Welcome!

Open Web Authors: Liz McMillan, Gilad Parann-Nissany, Carmen Gonzalez, Mark R. Hinkle, Elizabeth White

Related Topics: Cloud Expo, SOA & WOA, Web 2.0, Open Web

Cloud Expo: Article

Avoiding Unexpected Cloud Economics Pitfalls

There's more to the utility computing benefit of the Cloud than turning a faucet

Anybody who is considering a move to the Cloud knows that the greatest economic motivation for Cloud Computing is the pay-as-you-go, pay-for-what-you-need utility computing benefit, right? Deal with spikes in demand much more cost-effectively, the public Cloud service providers gush, since we can spread the load over many customers and pass the savings from our economies of scale on to you. The utility benefit is also a central premise of Private Clouds. Build a Private Cloud for your enterprise, the vendors promise, and you can achieve the same economies of scale as Public Clouds without all that risk.

Unfortunately, what sounds too good to be true usually is. There are a number of gotchas on both the Public and Private Cloud provider sides that limit—or even prevent—organizations from obtaining a full measure of the utility benefit. Let’s go back to economics class and take a closer look.

Clouds Like Water?
Turn on the faucet, only instead of water, you get Cloud. Sounds good, but we use water very differently than we do IT resources. With water, we generally use all we need without worrying about price. We may try to economize, and perhaps we’ll go through the trouble of digging a well if we need to fill our pool, but generally we don’t think about the cost of each flush or load of laundry.

The Cloud is just the opposite. The techies might not be thinking in terms of cost, but the bean counters definitely are. For a CIO or purchasing manager comfortable with entering resource costs into annual budget spreadsheets, the unknown nature of the Cloud bill strikes fear into their hearts—and their wallets. Instead of focusing on lowered costs, their worry is increased costs, since Cloud usage is inherently unpredictable. After all, that’s why landlords don’t like including heating costs in the rent. If the tenants aren’t responsible for keeping costs down then pay-as-you-go inevitably translates into pay more—and just how much more is a mystery until the bill arrives.

Enterprise Cloud customers in particular are beginning to push back, and as a result, Public Cloud providers must change their pricing model accordingly. Unfortunately, there aren’t many alternatives to simple pay-as-you go. One increasingly popular alternative that might ease Cloud purchasers’ minds is for providers to offer a tiered pricing system, with a fixed price for any consumption up to a pre-defined threshold, and pay-as-you-go above that. However, tiered pricing is not a panacea. While such a pricing model is straightforward and gives organizations an increased measure of predictability, it still doesn’t solve the problem of cost spikes.

If tiered pricing sounds more like paying for your mobile phone service than for utilities like water or electricity, you’re right. Not only does this approach reduce perceived risks for Cloud purchasers, it’s also a familiar model for the telcos, all of whom are looking to enter the Cloud market, or at the least, grow their existing Cloud offerings. As a result, ZapThink expects tiered pricing to become the norm for Public Cloud services over time, in spite of its drawbacks.

The irony with tiered Cloud pricing is that the more you require elasticity, the greater the risk that you’ll use up your allotted consumption for the month—but elasticity is the most important benefit of the Cloud. Sure, if you have steady, predictable consumption then tiered pricing is low risk, but if all you want is steady, predictable availability, then chances are keeping your resources on-premise or in a traditional hosted facility will be more cost-effective than moving to the Cloud in the first place, since you’re not particularly worried about spikes in demand.

To make matters worse, not everyone likes tiered pricing, of course. Anyone who’s used up their minutes or texts for the month only to be surprised by an excessive phone bill knows what I’m talking about. It seems the mobile phone providers love to play games with their pricing plans for the sole purpose of squeezing every penny out of their hapless customers. I’m sure we don’t want our Cloud providers to play the same dirty tricks.

The Subtleties of Cloud Churn
While it’s a common water cooler pastime to demonize mobile phone companies for their underhanded pricing policies, there is a downside for the providers as well: the dreaded customer churn. Since it’s relatively easy for customers to change phone providers, especially now that number portability is a reality, shifty behavior on the part of providers simply chases away customers.

Cloud churn is a very real problem for Public Cloud providers as well, as the ease of deprovisioning Cloud resources naturally eases the deprovisioning of customers. But there is an extra complication with Cloud churn that doesn’t have a parallel in the mobile phone world: Cloud resources that are no longer being used but still remain allocated to customers. Depending on the provider’s pricing model, the cost to the customer to maintain such resources may be minimal, but it’s not always clear whether those minimal amounts sufficiently cover the providers’ costs.

For example, I get monthly charges on my credit card from Amazon Web Services (AWS) for a few cents each month. I can’t remember how I signed up for AWS, but the amounts are so minimal, it’s not worth my time or trouble to cancel the service. Do those few cents per month cover Amazon’s costs, assuming there are potentially millions of such customers? Perhaps in Amazon’s case—but for less experienced providers with wafer thin margins, the economics might work to their disadvantage.

Furthermore, the proliferation of such idle instances may be a more significant issue for Private Cloud providers, since they typically have constrained budgets for data center buildouts. Amazon may be building new data centers as fast as they can, but your Private Cloud likely has a maximum practical size given your budget for the effort. The last thing you want is to fill it up with idle resources that various people in your organization can’t be bothered to fully deprovision.

The Demotivation Paradox
For the Public Cloud provider, the obvious solution to the problem of idle resources left over from Cloud churn is to charge enough for those resources. Either the cost will motivate people to fully deprovision them, so the argument goes, or at the very least, they generate enough money so that keeping them around is worthwhile for the providers.

But what if we’re talking about Private Clouds here? The way to charge internal customers for using Cloud resources is via chargebacks. And everybody hates chargebacks. Not only are they a bookkeeping hassle, but they also demotivate the consumption of shared resources. We went through this problem when we dealt with shared Services and SOA, and now we’re sharing Cloud resources, but the problem remains: the whole point to the Private Cloud is to achieve economies of scale across the enterprise, but the only way to make such economies work is if most or all divisions participate. Chargebacks, however, discourage that participation.

As it was with shared Services, the way to compensate for chargebacks is through effective governance: establish and enforce Cloud consumption policies that counteract the demotivational effects of chargebacks, and come up with a way to motivate people to follow such policies. While you’re at it, formulate policies governing the deprovisioning of instances that no one needs any more. But in the Cloud, such governance is especially challenging because of the diversity of resources and their corresponding consumption scenarios: policies for provisioning virtual machines as part of IaaS is quite different from, say, provisioning development tools on PaaS. It will take organizations with Private Clouds a good bit of trial and error to get the balance right.

The ZapThink Take
Another downside to the idle-resource-masquerading-as-paying-customer problem is that it makes it very difficult for financial analysts to gauge the health of a Public Cloud provider. This obfuscation can skew traditional metrics like number of customers or revenue per customer, and the distortion may be different from one provider to another. Combine the resulting confusion with the lean profit margins in today’s Cloud space, as providers push their prices ever lower to encourage growth, and you have a recipe for disaster. An ostensibly healthy Cloud provider might suddenly collapse due to a foundation of underperforming customers and idle resources.

Private Clouds face a corresponding problem, as executives review the financials for the Cloud effort. ZapThink predicts a backlash against Private Clouds in the next year or two, as vendors underdeliver on their Cloud promises—not necessarily through any fault of their technology, but rather because the reality of achieving cost advantages with Private Clouds is far more difficult than the vendors’ and analysts’ spreadsheets might have you believe.

If you’d like to learn more about the subtleties of Cloud economics, I’d be happy to have a deeper discussion at Cloud Expo in New York or The Business of Cloud Computing in Dallas, or any of the other conferences I’ll be presenting at. Please drop me a line if you’re interested. I’m curious as to whether issues of Cloud churn or Private Cloud demotivation are concerns in your organization.

Image source: Vegan Feast Catering

More Stories By Jason Bloomberg

Jason Bloomberg is the leading expert on architecting agility for the enterprise. As president of Intellyx, Mr. Bloomberg brings his years of thought leadership in the areas of Cloud Computing, Enterprise Architecture, and Service-Oriented Architecture to a global clientele of business executives, architects, software vendors, and Cloud service providers looking to achieve technology-enabled business agility across their organizations and for their customers. His latest book, The Agile Architecture Revolution (John Wiley & Sons, 2013), sets the stage for Mr. Bloomberg’s groundbreaking Agile Architecture vision.

Mr. Bloomberg is perhaps best known for his twelve years at ZapThink, where he created and delivered the Licensed ZapThink Architect (LZA) SOA course and associated credential, certifying over 1,700 professionals worldwide. He is one of the original Managing Partners of ZapThink LLC, the leading SOA advisory and analysis firm, which was acquired by Dovel Technologies in 2011. He now runs the successor to the LZA program, the Bloomberg Agile Architecture Course, around the world.

Mr. Bloomberg is a frequent conference speaker and prolific writer. He has published over 500 articles, spoken at over 300 conferences, Webinars, and other events, and has been quoted in the press over 1,400 times as the leading expert on agile approaches to architecture in the enterprise.

Mr. Bloomberg’s previous book, Service Orient or Be Doomed! How Service Orientation Will Change Your Business (John Wiley & Sons, 2006, coauthored with Ron Schmelzer), is recognized as the leading business book on Service Orientation. He also co-authored the books XML and Web Services Unleashed (SAMS Publishing, 2002), and Web Page Scripting Techniques (Hayden Books, 1996).

Prior to ZapThink, Mr. Bloomberg built a diverse background in eBusiness technology management and industry analysis, including serving as a senior analyst in IDC’s eBusiness Advisory group, as well as holding eBusiness management positions at USWeb/CKS (later marchFIRST) and WaveBend Solutions (now Hitachi Consulting).

@ThingsExpo Stories
Cultural, regulatory, environmental, political and economic (CREPE) conditions over the past decade are creating cross-industry solution spaces that require processes and technologies from both the Internet of Things (IoT), and Data Management and Analytics (DMA). These solution spaces are evolving into Sensor Analytics Ecosystems (SAE) that represent significant new opportunities for organizations of all types. Public Utilities throughout the world, providing electricity, natural gas and water, are pursuing SmartGrid initiatives that represent one of the more mature examples of SAE. We have s...
The security devil is always in the details of the attack: the ones you've endured, the ones you prepare yourself to fend off, and the ones that, you fear, will catch you completely unaware and defenseless. The Internet of Things (IoT) is nothing if not an endless proliferation of details. It's the vision of a world in which continuous Internet connectivity and addressability is embedded into a growing range of human artifacts, into the natural world, and even into our smartphones, appliances, and physical persons. In the IoT vision, every new "thing" - sensor, actuator, data source, data con...
How do APIs and IoT relate? The answer is not as simple as merely adding an API on top of a dumb device, but rather about understanding the architectural patterns for implementing an IoT fabric. There are typically two or three trends: Exposing the device to a management framework Exposing that management framework to a business centric logic Exposing that business layer and data to end users. This last trend is the IoT stack, which involves a new shift in the separation of what stuff happens, where data lives and where the interface lies. For instance, it's a mix of architectural styles ...
The 3rd International Internet of @ThingsExpo, co-located with the 16th International Cloud Expo - to be held June 9-11, 2015, at the Javits Center in New York City, NY - announces that its Call for Papers is now open. The Internet of Things (IoT) is the biggest idea since the creation of the Worldwide Web more than 20 years ago.
The Internet of Things is tied together with a thin strand that is known as time. Coincidentally, at the core of nearly all data analytics is a timestamp. When working with time series data there are a few core principles that everyone should consider, especially across datasets where time is the common boundary. In his session at Internet of @ThingsExpo, Jim Scott, Director of Enterprise Strategy & Architecture at MapR Technologies, discussed single-value, geo-spatial, and log time series data. By focusing on enterprise applications and the data center, he will use OpenTSDB as an example t...
An entirely new security model is needed for the Internet of Things, or is it? Can we save some old and tested controls for this new and different environment? In his session at @ThingsExpo, New York's at the Javits Center, Davi Ottenheimer, EMC Senior Director of Trust, reviewed hands-on lessons with IoT devices and reveal a new risk balance you might not expect. Davi Ottenheimer, EMC Senior Director of Trust, has more than nineteen years' experience managing global security operations and assessments, including a decade of leading incident response and digital forensics. He is co-author of t...
The Internet of Things will greatly expand the opportunities for data collection and new business models driven off of that data. In her session at @ThingsExpo, Esmeralda Swartz, CMO of MetraTech, discussed how for this to be effective you not only need to have infrastructure and operational models capable of utilizing this new phenomenon, but increasingly service providers will need to convince a skeptical public to participate. Get ready to show them the money!
The Internet of Things will put IT to its ultimate test by creating infinite new opportunities to digitize products and services, generate and analyze new data to improve customer satisfaction, and discover new ways to gain a competitive advantage across nearly every industry. In order to help corporate business units to capitalize on the rapidly evolving IoT opportunities, IT must stand up to a new set of challenges. In his session at @ThingsExpo, Jeff Kaplan, Managing Director of THINKstrategies, will examine why IT must finally fulfill its role in support of its SBUs or face a new round of...
One of the biggest challenges when developing connected devices is identifying user value and delivering it through successful user experiences. In his session at Internet of @ThingsExpo, Mike Kuniavsky, Principal Scientist, Innovation Services at PARC, described an IoT-specific approach to user experience design that combines approaches from interaction design, industrial design and service design to create experiences that go beyond simple connected gadgets to create lasting, multi-device experiences grounded in people's real needs and desires.
Enthusiasm for the Internet of Things has reached an all-time high. In 2013 alone, venture capitalists spent more than $1 billion dollars investing in the IoT space. With "smart" appliances and devices, IoT covers wearable smart devices, cloud services to hardware companies. Nest, a Google company, detects temperatures inside homes and automatically adjusts it by tracking its user's habit. These technologies are quickly developing and with it come challenges such as bridging infrastructure gaps, abiding by privacy concerns and making the concept a reality. These challenges can't be addressed w...
The Domain Name Service (DNS) is one of the most important components in networking infrastructure, enabling users and services to access applications by translating URLs (names) into IP addresses (numbers). Because every icon and URL and all embedded content on a website requires a DNS lookup loading complex sites necessitates hundreds of DNS queries. In addition, as more internet-enabled ‘Things' get connected, people will rely on DNS to name and find their fridges, toasters and toilets. According to a recent IDG Research Services Survey this rate of traffic will only grow. What's driving t...
Connected devices and the Internet of Things are getting significant momentum in 2014. In his session at Internet of @ThingsExpo, Jim Hunter, Chief Scientist & Technology Evangelist at Greenwave Systems, examined three key elements that together will drive mass adoption of the IoT before the end of 2015. The first element is the recent advent of robust open source protocols (like AllJoyn and WebRTC) that facilitate M2M communication. The second is broad availability of flexible, cost-effective storage designed to handle the massive surge in back-end data in a world where timely analytics is e...
Scott Jenson leads a project called The Physical Web within the Chrome team at Google. Project members are working to take the scalability and openness of the web and use it to talk to the exponentially exploding range of smart devices. Nearly every company today working on the IoT comes up with the same basic solution: use my server and you'll be fine. But if we really believe there will be trillions of these devices, that just can't scale. We need a system that is open a scalable and by using the URL as a basic building block, we open this up and get the same resilience that the web enjoys.
We are reaching the end of the beginning with WebRTC, and real systems using this technology have begun to appear. One challenge that faces every WebRTC deployment (in some form or another) is identity management. For example, if you have an existing service – possibly built on a variety of different PaaS/SaaS offerings – and you want to add real-time communications you are faced with a challenge relating to user management, authentication, authorization, and validation. Service providers will want to use their existing identities, but these will have credentials already that are (hopefully) i...
"Matrix is an ambitious open standard and implementation that's set up to break down the fragmentation problems that exist in IP messaging and VoIP communication," explained John Woolf, Technical Evangelist at Matrix, in this SYS-CON.tv interview at @ThingsExpo, held Nov 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA.
P2P RTC will impact the landscape of communications, shifting from traditional telephony style communications models to OTT (Over-The-Top) cloud assisted & PaaS (Platform as a Service) communication services. The P2P shift will impact many areas of our lives, from mobile communication, human interactive web services, RTC and telephony infrastructure, user federation, security and privacy implications, business costs, and scalability. In his session at @ThingsExpo, Robin Raymond, Chief Architect at Hookflash, will walk through the shifting landscape of traditional telephone and voice services ...
Explosive growth in connected devices. Enormous amounts of data for collection and analysis. Critical use of data for split-second decision making and actionable information. All three are factors in making the Internet of Things a reality. Yet, any one factor would have an IT organization pondering its infrastructure strategy. How should your organization enhance its IT framework to enable an Internet of Things implementation? In his session at Internet of @ThingsExpo, James Kirkland, Chief Architect for the Internet of Things and Intelligent Systems at Red Hat, described how to revolutioniz...
Bit6 today issued a challenge to the technology community implementing Web Real Time Communication (WebRTC). To leap beyond WebRTC’s significant limitations and fully leverage its underlying value to accelerate innovation, application developers need to consider the entire communications ecosystem.
The definition of IoT is not new, in fact it’s been around for over a decade. What has changed is the public's awareness that the technology we use on a daily basis has caught up on the vision of an always on, always connected world. If you look into the details of what comprises the IoT, you’ll see that it includes everything from cloud computing, Big Data analytics, “Things,” Web communication, applications, network, storage, etc. It is essentially including everything connected online from hardware to software, or as we like to say, it’s an Internet of many different things. The difference ...
Cloud Expo 2014 TV commercials will feature @ThingsExpo, which was launched in June, 2014 at New York City's Javits Center as the largest 'Internet of Things' event in the world.