Cloud Computing is not a Pricing Model

Try searching for “cloud computing is cheaper” and you’ll find no shortage of opinions that support the notion that by going to the cloud, you will will save millions of dollars. Cloud Computing is full of hype and marketing over-reach. The most common overreach, in my opinion, relates to pricing. According to the true believers, there is a magic to Cloud Computing that instantly lowers your costs. The web site Cloud Computing Defined is typical, claiming that “… because users pay only for the resources that they use, cloud computing is cheaper.” This is not to say that cloud computing cannot be cheaper – many cloud computing resources are even free. But Cloud Computing is not inherently cheaper – because Cloud Computing is not a pricing model.

In September 2011, the National Institute of Standards and Technology (NIST) published a paper titled “The NIST Definition of Cloud Computing” including the following definition:

Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.

The NIST goes on to discuss five essential elements of Cloud Computing, and four distinct deployment models. However, search the entire NIST document for price or pricing and you’ll be disappointed. Pricing is simply not part of the definition. In fact, the “cost” of Cloud Computing can be cheaper, the same, or more expensive than alternatives, depending on the pricing models used and the specific circumstances.

Many erroneous claims that Cloud Computing is cheaper come from the perception that subscription-based and/or pay-per-use pricing models are inherently cheaper than an up-front purchase. A quick example shows the folly of assuming that one pricing model is inherently superior to another. You need a car for transportation. Which is cheaper, renting, leasing, or buying the car? Renting at $50/day sounds cheaper than leasing at $500 per month, and both sound a lot cheaper than buying a $25,000 car. Plus, when you rent a car, you don’t have to worry about servicing your car, and you get all of the latest cool features (because you get the new model year when it’s available). The Rental Car companies get much lower prices from the manufacturers than consumers, and can share the fleet to keep costs down. It’s almost CaaS (Car-as-a-Service)! If you find yourself away from home for a week or two, you rent a car. So why doesn’t everybody rent a car all of the time? Because even if you only rent on weekdays, you spend $50 * 250 days/year = $12,500/year. If you can by a car for $25,000, and you expect to use it for more than two years, you wouldn’t rent it (especially if prices go up over time!).

Economics 101 starts by teaching us that different people have different preferences. Pricing on the cloud is no different. As Frank Scavo notes in his blog Cutting Through the Fog of Cloud Computing Definitions, “how the customer pays for the service has no bearing as to whether the service is cloud computing.” A perpetual software license (a license purchase) can be delivered over the cloud as effectively as a pay-per-use model, and in some cases may be preferred. With ERP software lasting 7 years or more at most organizations, a perpetual software license model delivered through the cloud may offer all of the advantages of the cloud, with a pricing model that better meets the requirements of the business.

The Latin phrase caveat emptor loosely translates into “let the buyer beware,” and applies to anyone who accepts the marketing hype without inspection and automatically assumes that Cloud Computing is cheaper. Just because the label says Cloud doesn’t mean the solution is inherently cheaper – look at the price and compare to your other alternatives. Often, Cloud Computing solutions are cheaper – sometimes dramatically so. Just make certain you know what you are buying before you sign on the dotted line.

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