The 6 Best Cloud Hosting Providers For You – There is no doubt that the cloud is one of the most important platform changes in computing history. Not only has the cloud already impacted hundreds of billions of dollars in IT spending, it is still in its infancy and growing rapidly based on $100 billion in annual public cloud spending. These changes increase efficiency in both operations and finances with an incredibly strong value proposition: ready-to-use infrastructure at the scale your business needs. The cloud also helps foster innovation by freeing up business resources to focus on new products and growth.
But as the industry’s cloud experience matures and business economics allow us to see a more complete picture of the cloud’s lifecycle, it’s becoming clear that the cloud clearly delivers on its promise.
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As the company expands and growth slows its journey, the pressure on margins can begin to outweigh the benefits. as this change occurs
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It is difficult to reverse, as it is the result of years of development focused on new features and not infrastructure optimization in business life. Therefore, the rewrite or significant restructuring required to dramatically improve efficiency can take years and is often considered a non-starter.
There is now a growing awareness of the cloud’s long-term cost impact. As cloud costs begin to contribute significantly to gross cost of goods sold (COR) or cost of goods sold (COGS), some companies have taken the dramatic step of “repatriating” most of their workloads (Dropbox is an example). Or, in other cases, adopt a hybrid approach (like CrowdStrike and Zscaler). Those who have done this have reported significant cost savings. In 2017, Dropbox described in its S-1 the staggering cost of an infrastructure optimization overhaul, with cumulative savings of $75 million in the two years prior to its IPO. public cloud.
However, most companies find it difficult to justify moving workloads from the cloud given the scale of such efforts and, frankly, the dominant and somewhat idiosyncratic industry narrative that “the cloud is great.” (But we also need to consider the broader impact.) This is because the calculations change when we evaluate against the size of potential market capitalization losses presented in this post. As growth slows (often) with scale, short-term efficiency becomes a key driver of value in public markets. The overhead of the cloud causes low profit margins, which puts a heavy burden on the market capitalization.
But the point of this post is not to argue for extradition. This is a very complicated decision with different effects from company to company. Rather, we can take a first step in understanding how much market capitalization is held back by the cloud, helping us inform decision-making frameworks around infrastructure management based on enterprise size.
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To frame the discussion: We estimate the savings recovered in the extreme case of full repatriation and point to the effect on stock prices using public data. We (with relatively conservative assumptions!)
It currently leverages cloud infrastructure and is losing about $100 billion in market value due to the cloud’s impact on margins. That is to say, it is about running the infrastructure itself. Although our analysis focused on software companies, the impact of the cloud is by no means limited to software. Extending this analysis to a wider range of publicly traded companies that could benefit from the associated cost savings, the total impact is estimated to be potentially $500 billion or more.
Our analysis highlights the value that can be achieved through cloud optimization through system design and implementation, reengineering, third-party solutions for cloud efficiency, or moving workloads to purpose-built hardware. This is a very counter-intuitive assumption in the industry given the dominant narratives surrounding cloud versus on-premise. But apart from short-term savings, considering the impact on market capitalization
To size cloud costs and understand the potential savings from optimization, we start with a more extreme large-scale cloud repatriation case: Dropbox. When the company began an infrastructure optimization initiative in 2016, it converted most of its workloads to “low-cost custom infrastructure in colocation facilities,” which are leased and operated directly in the public cloud, saving nearly $75 million over two years. Dropbox. Dropbox’s gross margins increased from 33% to 67% between 2015 and 2017, “primarily due to infrastructure optimization and revenue growth during this period.”
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But that’s just Dropbox. So to generalize the potential savings from cloud repatriation to a wider range of companies, Thomas Dullien, a former Google engineer and co-founder of Optimyze, a cloud computing optimization company, says $100 million in annual public cloud spending can be estimated by repatriation, I guess.
Total annual total cost of ownership (TCO) from server racks, real estate and cooling to network and engineering costs.
. In addition, a director of engineering for a large consumer Internet company has found that list prices for public clouds can be 10 to 12 times the cost of running their own data centers. Discounts based on commitment and volume are common in the industry, and you can get this multiple down to single digits because cloud computing typically cuts ~30-50% on commitment usage. However, AWS is still operating at a blended operating margin of around 30%, combined with these discounts and an aggressive R&D budget. Performance gains from managing your own hardware can provide more benefits.
A 50% savings from cloud repatriation is especially meaningful when considering the size of cloud spend as a percentage of total cost of revenue (COR). Benchmarking open source software companies (those that disclose committed cloud infrastructure spending) found that contracted spending averaged 50% of COR.
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Actual spend expressed as a percentage of COR is usually much higher than committed spend. The private billion-dollar software company found that its public cloud spending reached 81% of its COR, and that “cloud spending is 75% to 80% of its revenue.” It was common among software companies.” Dullien observed (from his time at industry leader Google and now Optimyze) that companies are often conservative when sizing their cloud commitments, for fear of overcommitting their spending, so they only commit to baseload. So in general, commitment spend is usually ~20% lower than actual spend. Elasticity decreases in both directions. Some of the companies we spoke to reported exceeding their contracted cloud spending forecasts by at least two times.
Estimating these benchmarks for the broader software companies that leverage some public cloud for their infrastructure reveals the top 50 publicly traded software companies (which reveal how much they’re spending on the cloud in this annual report). Some of these companies use a hybrid approach, the public cloud, but
On-premises (meaning cloud spend may have a lower COR ratio compared to the benchmark) – Our analysis is balanced by assuming committed spend equals actual spend across the board. From our conversations with experts, we estimate that cloud repatriation could reduce cloud costs by 50%, totaling $4 billion in revenue savings. For large-scale public software and consumer Internet companies leveraging cloud infrastructure, this number can be much higher.
An estimated net savings of $4 billion is staggering on its own, but it is
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. Since all companies are conceptually valued at the present value of future cash flows, realizing these total annual net savings would result in a market capitalization in excess of $4 billion.
How much more? A rough proxy is to look at how the open markets value each additional gross profit dollar. High-growth software companies that are still burning cash are often valued at gross earnings multiples that reflect assumptions about the company’s long-term growth and profitable margin structure. (Commonly referred to as earnings multiples also reflect a company’s long-term profit margins, so they tend to increase for companies with high gross margins, even on a growth-adjusted basis.) However, both capitalization multiples are market discounts for the company’s future cash flows. It works as a heuristic to estimate .
Among the 50 public software companies we analyzed, the average total enterprise value to 2021E gross earnings multiple (based on CapIQ at time of publication) is 24-25x. In other words, for every $1 in gross profit saved, market capitalization increases by an average of 24 to 25 times the net cost savings from cloud repatriation. (Where applicable, savings are assumed to be incremental CapEx net of accrued depreciation.)
This means that an additional $4 billion in gross profit could generate an additional $100 billion in market capitalization from just these 50 companies. Use of the gross profit multiple (relative to the free cash flow multiple) also assumes that incremental gross profit dollars are also associated with a particular incremental operation.
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