The Cost of Cloud, a Trillion Dollar Paradox
There is no doubt that the cloud is one of the most significant platform shifts in the history of computing. Not only has cloud already impacted hundreds of billions of dollars of IT spend, it’s still in early innings and growing rapidly on a base of over $100B of annual public cloud spend. This shift is driven by an incredibly powerful value proposition. Infrastructure available immediately, at exactly the scale needed by the business — driving efficiencies both in operations and economics. It also helps cultivate innovation as company resources are freed up to focus on new products and growth.
However, as industry experience with the matures. We see a more complete picture of cloud lifecycle on a company’s economics. It’s becoming evident that while cloud clearly delivers on its promise early on in a company’s journey. The pressure it puts on margins can start to outweigh the benefits, as a company scales and growth slows.
Now, there is a growing awareness of the long-term cost implications. As the cost starts to contribute significantly to the total cost of revenue (COR). cost of goods sold (COGS). Some companies have taken the dramatic step of “repatriating” the majority of workloads. In other cases adopting a hybrid approach (as with CrowdStrike and Zscaler). Those who have done this have reported significant cost savings: In 2017, Dropbox detailed in its S-1 a whopping $75M in cumulative savings over the two years prior to IPO due to their infrastructure optimization overhaul, the majority of which entailed repatriating workloads from public space.
Unit economics of cloud repatriation:
To dimensionalize the cost of cloud, and understand the magnitude of potential savings from optimization. let’s start with a more extreme case of large scale cloud repatriation Dropbox. When the company embarked on its infrastructure optimization initiative in 2016, they saved nearly $75M over two years by shifting the majority of their workloads from public cloud to “lower cost, custom-built infrastructure in co-location facilities” directly leased and operated by Dropbox. Dropbox gross margins increased from 33% to 67% from 2015 to 2017.
