McKinsey: Data Centers Cheaper Than Cloud

cloudsIs cloud computing more expensive that running your own data center? It can be for larger users, according to McKinsey & Company, which says that a typical corporate data center is more economical than Amazon’s EC2 when measured in cost per CPU equivalent. McKinsey detailed its findings in a report released today at the Uptime Institute’s Symposium 2009 in New York, titled “Clearing the Air on Cloud Computing.”    

McKiney’s conclusion runs counter to much of the messaging from the cloud computing industry, which asserts that running applications in a third-party data center with usage-based pricing offers better economics than building and operating a data center. 

The cost comparison is one highlight of a broadly skeptical report, which says that cloud computing has tremendous promise, but the growing hype for the cloud could lead to a “trough of disillusionment” for large enterprise users.

“Cloud computing has shown great promise for start-ups and pet projects for large corporations,” McKinsey writes. “However, it is not ready to help with the big challenges of big companies. Cloud computing can divert attention IT departments’attention from technologies that actually deliver sizeable benefits.”

Current cloud computing offerings are not cost-effective compared to large enterprise data centers, McKinsey said, citing an average cost of $45 per CPU per month for a typical enterprise data center. The equivalent cost of virtual cores in large jobs on EC2 ranges from about $70 to $140 a month on Linux and $100 to $180 a month for Windows. McKinsey said the only scenario in which EC2 was competitive was when users pre-pay for Linux servers.

Amazon’s platform makes much more sense for smaller companies, said McKinsey, which estimates that about half the use cases for smaller jobs on EC2 are cheaper than the $45 a month CPU equivalent for an in-house data center.       

McKinsey cited one area where enterprises can save money in the cloud: migrating applications from Windows servers in their data center to Linux-powered cloud platforms. The consulting firm estimated that companies could save 10 to 15 percent in staff costs by shifting its data center operations to the cloud, but those gains would be more than offset by the differential in hardware pricing.

“Rather than create unrealizable expectations for ‘internal clouds,’ CIOs should focus now on the immediate benefits of virtualizing server storage, network operations and other critical building blocks,” McKinsey concludes. These virtualization projects can help enteprise providers realize utilization improvements that can approach the rates seen for large public clouds, according to the report.

McKinsey defines a “typical” enterprise data center as having 10 percent capacity utilization. That number is consistent with some estimates of data center inefficiency, but enterprises that have used virtualization to consolidate servers are likely to have higher utilization rates. The number matters because it assumes a large available gain for investments in virtualization as an alternative to cloud deployment.

It’s also worth noting that any smaller cloud providers are making similar comparisons with pricing on EC2, seeking to position their services as more affordable alternatives.    

Finally, it’s worth noting that McKinsey couldn’t resist offering its own definition of cloud computing, which it estimates is the 23rd such attempt. Here’s McKinsey’s definition: Clouds are hardware based services offering compute, network and storage capacity where:

  • Hardware management is highly abstracted from the buyer
  • Buyers incur infrastructure costs as variable OPEX
  • Infrastructure cost is highly elastic (up or down) 

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About the Author

Rich Miller is the founder and editor at large of Data Center Knowledge, and has been reporting on the data center sector since 2000. He has tracked the growing impact of high-density computing on the power and cooling of data centers, and the resulting push for improved energy efficiency in these facilities.

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5 Comments

  1. These guys get it. Both their analysis and definition are spot-on. If I were a startup with limited resources? Or if I'm focussing on building a business in "useless chatter" (ie a twitter-like, myspace-like model, where data is in constantly churning and changing and stuff from the day-before-yesterday is irrelevant) then I'd be all over the outsourced cloud for my needs. It scales and shrinks. I get that. But if I am a CIO in corporate America? No way. My data is critical. My data history is critical. My data integrity and audit ability is even more critical. I'd be building, or leasing my own datacenter, or if not large enough, I'd be buying colocation. --chuck

  2. Ky

    The summary here is very simple...the cloud model is not for everybody. However, the headline is misleading and inappropriate ("Data Centers Cheaper Than Cloud"), which is not always true. --ky

  3. Catalina588

    Wish I had seen the presentation live. Recommend readers download it and review because it is spot on. The article above missed the key takeaway: enterprise datacenters need to rearchitect infrastructure with virtualization to drive much higher average utilization rates (10% today used by McKinsey, for example). Above a "magic", to-be-determined, enterprise-independent, cost-effective utilization rate of 60% (hypothetically), throw the excess workloads on the clouds and pay as variable operating expenses. Think of all the peak hour-capacity, monthly- and annual- job capacity that sits idle most of the time and could be moved, as needed, into the cloud -- reducing the daily operating loads and needed capacity substantially (i.e., materially).

  4. As a small business owner, I must say, cloud has been a life saver. As our needs grow I am sure our options will too.

  5. OPM

    These guys have clearly never built a datacenter, the initial capital investment is not for everybody, it is massive, the data center or a virtual data center both have their applications, would Google, MS, or amazon run on the cloud, they might, BECAUSE FREE CASH matters.....but, Data Centers are cheaper than cloud...so cloud, as applied to MS and Google, must exceed 600M of investment....in my books, that's a lot of compute cycles and lowly utilized assets...