Why Cloud Vendors Love Charging Less

June 28 2012 | by Sharon Wagner AWS, Cloud Cost, Jevons Paradox

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When we first started talking to investors about how Cloudyn could help optimize cloud consumption, everyone wanted to understand why cloud providers like AWS or Rackspace would be willing to play ball with us. As accessing data from cloud providers was (and still is) an important ingredient in our solution, the VC’s critique made sense. We would be helping AWS or Rackspace clients use their cloud more efficiently and economically. While this would be great news for cloud customers, it would mean significantly less revenue for cloud providers – and as a result, probably very little interest and cooperation on their part.

Jevons’ Paradox – When Efficiency Drives Increased Adoption

Our response to the critique was based on Jevons’ paradox. Formulated by English economist William Stanley Jevons, the paradox states that creating efficiencies in the usage of a given resource will actually increase its consumption instead of decreasing it. The reason behind this is simple. Greater efficiencies generally translate into cost savings. When a resource becomes more economical to use, smart people will find more ways to use it.

A classic example of this is Jevons’ own 1860’s study where he noted that as coal-based technologies became more “fuel efficient”, more usages and applications were “discovered” for coal-burning equipment. So while the amount of coal needed per individual unit was less, there was an increasing demand for coal in a wider range of areas than before.

In our context, we explained to potential investors, that cloud providers would be the main beneficiaries of an economical and efficient cloud. If we could help make cloud consumption more efficient and affordable, the market demand would grow tremendously with companies like AWS and Rackspace happily partnering with us to offer their clients optimized cloud consumption.

Jevons’ Paradox at Work in the Cloud

A nice example of Jevons’ paradox in the cloud cost context is mentioned in a Gigaom post by Dave Roberts, SVP at ServiceMesh. A large bank told Roberts that as cloud costs dropped it made financial sense to take on more projects which before had been economically unviable (read unprofitable). In short, lower costs drove increased cloud consumption for this bank, benefiting both them and their cloud provider.

We have seen similar results with our clients as well. In cases where we helped clients slash their cloud costs (sometimes up to 67%), they would literally turn around and start using cloud resources in more projects than before.

In the Cloudyn client example below, (taken with permission of course), one can view a comparison of cost vs. Elastic compute unit hours (summary of all running servers in the same day) which clearly demonstrates Jevon’s paradox.Jevons-Paradox-at-work-in-the-Cloud

At point A, the daily cost for roughly 600 compute unit hours was almost $23. Dividing the daily cost by the number of compute units, results in a $0.038 per compute unit hour. At this point, based on our cost optimization recommendation, the user changed pricing models and switched from on-demand to reserved instances. While cost dropped, true to Jevons’ paradox, the number of consumed compute unit hours increased.

At point B, we can also see how the user leverages 700 compute unit hours for $15, which reflects a cost of $0.021 per compute unit hour – around 36% less than the cost of compute unit hour before doing the reservation.

Other Adoption Drivers – Beyond Cloud ROI

While dropping cloud cost is a major reason for using the cloud, Daryl Plummer, VP at Gartner argues in his Forbes article, that ROI is not and should not be the main reason driving adoption. He maintains that the value that companies gain from cloud computing make it worthwhile, despite any extra expenses. He writes that if you are “seeking rapid change, more agility in provisioning application development platforms, or a reduction in energy use in your company”, it might be worth it to use the cloud even at slightly higher prices.

Here at Cloudyn we also address Plummer’s value-centric approach to the cloud. Our analytics help increase collaborative business practices. By identifying underutilized or unused cloud resources our clients can reallocate these resources to other business units that do need them. Additionally, by minimizing over-provisioning we help reduce managerial workloads as well as security and data loss risks.

Some of our clients have said the same, telling us that the value of our cloud insight and optimization, is not just about cutting cost, but rather about enhanced usability for more effective business management.

To discover how we can get you started on the path of increased cloud value – contact us today!

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