The Cost of Cloud, a Trillion Dollar Paradox

A quite fascinating article about the long term costs of enterprise cloud approaches. No-one os arguing the value of migrating to the cloud for many of its benefits…including initial cost savings. But as this article points out, longer term it it not so simple to calculate.

https://a16z.com/2021/05/27/cost-of-cloud-paradox-market-cap-cloud-lifecycle-scale-growth-repatriation-optimization

Yet most companies find it hard to justify moving workloads off the cloud given the sheer magnitude of such efforts, and quite frankly the dominant, somewhat singular, industry narrative that “cloud is great”. (It is, but we need to consider the broader impact, too.) Because when evaluated relative to the scale of potentially lost market capitalization — which we present in this post — the calculus changes. As growth (often) slows with scale, near term efficiency becomes an increasingly key determinant of value in public markets. The excess cost of cloud weighs heavily on market cap by driving lower profit margins.

The example they use of Dropbox is quite compelling:

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, which they noted was “primarily due to our Infrastructure Optimization and an… increase in our revenue during the period.”