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Motley Fool Issues Rare “All In” Buy Alert
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Public cloud platforms like Amazon‘s (AMZN -4.10%) AWS have truly changed the game for start-ups. Instead of having little choice but to own and operate their own servers, the cloud makes it easy to spin up resources quickly and on demand. A sudden surge in usage can cripple a physical server, and scaling involves upgrading hardware or setting up additional servers. In the cloud, resources can be scaled up seamlessly to handle any amount of traffic.
This convenience and scalability come at a cost. Cloud computing is not cheap. The price is often worth paying for companies that are scaling rapidly or subject to extreme spikes in usage. It makes perfect sense for Netflix to run entirely on AWS, since usage can spike during peak viewing hours or when a new season of a hit show is released. Netflix wouldn’t have been able to grow as quickly or invest as much in content if it was busy frantically scaling up its own infrastructure.
There are plenty of companies that never made the jump to the cloud, but there aren’t too many that were born in the cloud and then made the jump to operating their own servers. Any kind of migration is an ordeal, and running your own hardware requires hiring people to manage that hardware.
But for a company that has reached a decent scale, with stable and predictable growth and little chance of a sudden spike in usage, cloud computing is almost certain to be far more expensive in the long run than running an in-house infrastructure. Renting is always going to be more expensive than buying.
The benefits of the cloud partly fade away when a medium-to-large-sized company has no need to rapidly scale resources up and down. The cloud is simpler than running servers in some ways, but it’s not guaranteed to be simpler overall. Netflix, for example, still spent nearly $2.3 billion last year on payroll and related expenses for employees responsible for the tech side of the business. That number does not include the actual cloud computing costs.
Earlier this month, co-founder of email start-up HEY David Heinemeier Hansson published a blog post stating that the company was moving from an all-cloud infrastructure to its own hardware. The cloud made sense for HEY when it first launched two years ago, but the company has now reached a decent scale and has largely predictable growth.
As companies grapple with an economic slowdown and a potential recession, cloud computing bills should receive more scrutiny. HEY spends half a million dollars a year on database and search services from AWS. “Do you know how many insanely beefy servers you could purchase on a budget of half a million dollars per year?” Hansson asks in his blog post.
Running those servers close to 100% utilization would be far cheaper than renting the same quantity of resources from AWS. And moving from the cloud likely wouldn’t be more complicated or lead to higher operations costs. “Anyone who thinks running a major service like HEY or Basecamp in the cloud is ‘simple’ has clearly never tried … I’ve yet to hear of organizations at our scale being able to materially shrink their operations team, just because they moved to the cloud,” Hansson said.
Cloud computing is not going anywhere. Cloud platforms are ideal for many types of companies, offering benefits that in-house hardware simply can’t match. Cloud computing will almost certainly continue to eat up an increasing share of global IT spending.
But there are likely many companies like HEY that look at their cloud computing bills and wonder if there’s a better way. There are likely many companies starting to feel the sting of high inflation and economic uncertainty, and that are actively looking for ways to cut costs. For any company that doesn’t benefit much from the scalability of the cloud, a fat cloud computing bill is an obvious target.
Whether HEY’s move is the beginning of a trend or an anomaly is hard to say. But there’s clearly some resistance brewing to the idea that the cloud is the answer for every company. AWS competes with myriad other cloud platforms, but it may find itself increasingly competing with the realization that cloud computing is not all it’s cracked up to be.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.
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