Recently, McKinsey released a report titled “Clearing the air on cloud computing” and it has upset many of the Cloud Computing advocates. According to this report, the cloud computing services like Amazon EC2 might offer substantial savings for small and medium companies but they are pretty expensive from the enterprise point of view. They also argue that enterprises can cut costs by using suitable virtualization technologies. As expected, this report is being used by those who are threatened by Cloud Computing to whip up FUD.

I cannot dismiss the report entirely but I have some problems with it. If you check the slides on page 22 and 23, they have made some cost comparison between Amazon EC2 and the traditional enterprise datacenters. This is the part I am uncomfortable with in the report.

• They have quoted the Total Costs of Assets (TCA) in the case of traditional datacenters to be $45 per month. This seems to be extremely low amount from the back of the envelope kind of calculations I made.
• I am really not sure if they took into account the total energy consumption, cooling costs, etc., in their calculation. Unless I am doing something terribly wrong, I don’t see how they can get such a low TCA.
• To me, it appears that they have not included the labor costs associated with hiring technicians and others to manage all aspects of the datacenter.
• Also, one of the advantages of Cloud based servers is their utility pricing. I am not sure if they took this into account while calculating the costs associated with the cloud server resources and usage to match the costs calculated at the 10% utilization of the traditional datacenters. The resources on the Cloud need not be considered to be “on” 24/7/365 like the traditional datacenter resources while doing the math for the costs.

I have some serious misgivings with the numbers presented in the report. Here is my request to all the analysts who throw up numbers to justify their conclusions. Please present the damn calculation in its entirety. In the absence of such an information about how the numbers were crunched, there is no way one can prove or disprove the conclusions. This leads to further confusion and the associated FUD.

It is not just me who is feeling about the report this way. The folks at Rightscale also think that there is something messy in their calculations

In particular, it doesn’t seem to be accounting for the costs correctly and it  completely fails overlook the benefits of automation in the cloud which ultimately leads to a revolution in the way compute resources are consumed.

The cost equation in the report starts on slide 22 and it’s really, really sketchy. They mix EC2 compute units and cores together (compare 22 and 23). They talk about “$14K/Server (2 CPU, 4 core)” which on my calculator comes out to $97/core/month over 3 years, but they have a cost of $45/mo/cpu on the same slide (and $97 doesn’t even account for the facility or power or cooling).

On slide 24 they suddenly compare an in-house datacenter server with “75% of EC2 Large Standard Windows configuration on Amazon EC2″ and nowhere do they mention that the latter cost includes the Windows license. Ouch!

I just hope that the author of the report follow it up with a blog post explaining how they made their calculations. If not, this report means nothing except for its FUD value.

I will also take this post to vent my gripe against Amazon’s pricing structure. In my opinion, the pricing is still too high for something that is supposed to be commoditized like electricity. I was hoping for the prices to come down but so far there is no movement on that front. There is some competition coming up from GoGrid and Rackspace but, at this moment, their pricing strategy is not a cause of concern for Amazon. If Amazon is serious about getting into the enterprise IT with full force, they have to lower their prices drastically. Unless the pricing is very attractive, enterprises are not going to get out of their comfort zone anytime soon.