Are There Tax Breaks in The Cloud?

An interesting conversation broke out on Twitter yesterday during the Cloud Connect conference, when AT&T’s Joe Weinman (via a tweet from Jay Fry) noted that Netflix “treats reserved AWS instances as CapEx and depreciates them over 3 years.” Netflix has shifted much of the infrastructure for the streaming video portion of its business to Amazon Web Services, as described by Vice President of Systems Engineering Kevin McEntee in one of the keynotes at the Cloud Connect event.

The discussion highlighted the potential advantages of Amazon’s Reserved Instances, a new pricing model for its EC2 compute-on-demand service offering customers the ability to reserve large amounts of capacity for future use. Netflix says it is effectively treating the  reserved server instances as though they were physical servers.

Reuven Cohen of Enomaly operates SpotCloud , an online marketplace bringing together buyers and sellers in a cloud capacity clearinghouse. Cohen blogged about the concept, saying that Netflix probably means amortization rather than depreciation – but expressing appreciation for the potential strategies suggested by how Netflix is approaching the issue.

“Previously I saw the opportunity for ‘cloud futures’ from the point of view of the provider the capacity,” Cohen writes. “Basically allowing the provider a greater level of insight into future capacity consumption, inventory and capacity planning. The missing part of the equation has been on the buy side, other then potentially locking in a future price, (as a hedge) the rationale for buying future computing capacity was fairly limited. With the introduction of amortization to the equation the concept dramatically shifts from not only a capacity planning exercise but also to a tax and accounting strategy for major buyers of computing capacity.”

I’m not an accountant. But the notion of depreciating/amortizing reserved cloud instances seems to add another wrinkle to the economic model for large-scale use of the Amazon platform. What’s your take? We welcome your comments.

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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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  1. C Doom

    They won't be wrinkling anything if EC2 keeps not scaling. Various Netflix employees keep tweeting and/or posting about problems and outages. Reddit had some noise about one too recently. Both cited EC2 / AWS. Seems Amazon's learning curve isn't quite up to the real-world demonstrated need just yet. But decisions get made outside the server room...