Public vs Private Cloud: Why Some Enterprises Make the Switch to In-House Data Centers

Aug 10 2016 | by Jonathan Maresky

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From the very early days of the public cloud, low upfront costs and drastically reduced lead times have made pay-as-you-go computing a particularly attractive choice for start-up businesses. Then, as vendor propositions came of age, a wave of large-scale enterprises began to see the huge business benefits of modern, elastic, on-demand computing environments and started moving their workloads to the cloud.

But recently, a small number of high-profile companies, such as file-sharing service Dropbox and leading inbound marketing and SEO company Moz, have moved in the opposite direction by taking sovereignty of their data and building their own in-house private clouds.

They follow in the footsteps of social gaming platform Zynga, which moved its service out of AWS in 2009. But, for Zynga, the decision to cut loose from Amazon proved a catastrophic failure. Not only did it struggle with the sheer complexity of building its own large-scale IT infrastructure but it also made the move just as sales revenue imploded.

So why would such a company choose to ditch public cloud in the first place? And why have other prolific cloud users done the same? In this post, we examine the key drivers behind such decisions and the implications they could have for other enterprise-level public cloud consumers.

1. Operational Costs

The last 20 years have seen the emergence of a whole new generation of companies that build their entire business model exclusively around the provision of digital services. And the bigger their customer base grows, the more compute resources they consume. If such a business is built in the cloud, even with highly efficient cost monitoring and usage control, it will inevitably see its operational costs escalate as it rapidly grows.

At some point, it may outgrow the cloud and reach a scale where it can afford to start building its own purpose-built data centers. It’s important to remember that, however tight their operational margins, vendors such as AWS and Azure still ultimately exist to make a profit. So for some businesses, such as Dropbox and Moz, it may make more economic sense to host their data on their own infrastructure.

2. Vendor Lock-In

Vendor lock-in is a problem in which a company cannot easily move its on-premise or cloud-based IT to a competing vendor’s infrastructure. When a company hosts its IT on a specific cloud vendor platform, it has to adopt the provider’s own API and other proprietary technologies. These may be incompatible with those of its competitors, making migration to an alternative provider a complex and expensive process. Not only that, but vendors charge for moving data out of their platforms and may also tie customers into lengthy, restrictive contracts.

For Dropbox, the transition to in-house data centers proved an epic feat of IT engineering. What’s more, it was a race against time, as its main contracts with Amazon were coming to an end. So, with the amount of data stored in its cloud ballooning by the day, Dropbox came to the conclusion it was the right time to make a move.

3. Digital Sharecropping

Closely tied to vendor lock-in, digital sharecropping is a new phenomenon that was created by the Internet. The concept comes from the term sharecropping, which refers to the problems southern-state farmers faced as a result of planting their crops on someone else’s land.
With vendor lock-in, you at least have a choice where you host your data, even though it could be costly to move to another provider. By contrast, with digital sharecropping, you have no choice at all, as your entire business model is dependent on one particular vendor.

For example, companies that rely on organic traffic from Google have been ruined overnight as a result of changes to the search engine’s algorithms. Businesses built around Facebook were badly hit when the social network significantly reduced the organic reach of their posts. And, similarly, third-party cloud solutions companies that sell only products and services based around one cloud provider are at the mercy of that provider and could be subject to changes that have the potential to put them out of business.

There’s no evidence to suggest any company has ever moved their data off the cloud through fear of digital sharecropping. And that includes Dropbox, who are known to have cited raw economics as the basis for their decision. All the same, the three main cloud vendors, Amazon, Microsoft and Google, are now beginning to challenge Dropbox with their own file-sharing products — Amazon Zocolo, Microsoft OneDrive and Google Drive. If Dropbox had remained on AWS, it’s not clear what problems it might’ve eventually encountered by hosting on a platform owned by a direct competitor.

4. The Wrong Fit

Sometimes a company might simply find the cloud no longer fits their individual needs. Cloud vendors may lack certain enterprise-grade features for specific products or the right environment to ensure software stability and compliance. And the only satisfactory option is to build a purpose-built on-premise system.

This was one of the major factors in the decision by Moz to build its own customized infrastructure. Similarly, when Dropbox moved to its own data centers, it didn’t just build a like-for-like replacement for S3. Instead, it took the opportunity to build a custom system tailored to its own specific technical challenges.

The Trend towards Hybrid Cloud Models

A crucial facet to all three of the high-profile cases we’ve highlighted is the fact that none of the companies involved has completely abandoned the public cloud. Zynga was forced to migrate most of its data back to AWS. And, despite making a successful switch to in-house infrastructure, both Dropbox and Moz continue to use AWS for some of their workloads.

These examples go to show that, in the case of the cloud, it’s not just a simple matter of being all in or all out. Moreover, they underline the current trend towards the adoption of hybrid cloud models, where enterprises use their in-house resources for predictable, everyday workloads and cloud infrastructure services for bursting during peak demand and supporting rapid IT growth.

In other words, hybrid cloud arrangements offer enterprises the best of both worlds. And that’s where the financial balancing act between the benefits of fixed costs and the flexibility of the pay-as-you-go model begins.

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