Cloud computing is often referred to as a technology or even a commodity. However, it is actually a paradigm shift in the business and economic models for provisioning and consuming information technology that can lead to a significant cost savings. These cost savings can only be realized by significant pooling of these “configurable computing resources” or resource pooling. This capability is an essential characteristic of cloud computing. Resource pooling defines the ability of a cloud to serve multiple consumers using a multitenant model with different physical and virtual resources dynamically assigned and reassigned according to consumer demand.

Economic Impact of the Cloud Computing Model

Businesses must always deal with the disparity between the capacity to produce products and deliver services—which is fixed in the short term—and the demand for those products and service—which is almost always variable at any time scale. Customer demand in just about any circumstance is volatile. While some tactical measures can be taken to alleviate some scenarios, cloud computing models have been shown capable of economically solving the so-called “demand dilemma” when applied to cloud computing–compatible business models.

Cloud computing can economically address the “capacity conundrum” where companies build capacity to match peak demand, which typically leads to substantial excess capacity during off-peak periods. This excess capacity represents either nonproductive capital or unnecessary expense. Conversely, if capacity is sized to the baseline, there will be insufficient resources to handle spikes. Transactions not served represent demand for the products or services that the business would have monetized, resulting in lost revenue or lost worker productivity.

For the cloud service provider, cloud computing economics depends on the expected consumption characteristics of the targeted customer population. These factors drive the cloud provider’s ability to use the minimum amount of physical IT resources to service a maximum level of IT resource demand. Properly balancing these factors across a well- characterized user group can lead to ~30 percent savings in IT resources. This enables the near-real-time modification of the underlying physical infrastructure required for the delivery of the desired “illusion of infinite resources” that is synonymous with a cloud computing user’s experience.

Cloud service providers bring massive economies of scale to computing and deliver computing resources on demand. Before cloud computing, companies had to make ever-growing capital expenditures (CapEx) in computing resources to implement new information systems and to accommodate potential peak loads. This led to overcapacity and underutilization. Cloud computing can help exploit short-term business opportunities, because cloud computing services are consumed using a variable operation expenditure (OpEx) model, which:

• Eliminates long-term investments when exploring new business models
• Is an efficient enabler of cross-device access and synchronization of content or applications across a single user with multiple devices
• Eliminates hardware costs normally associated with new systems or services

This combination drives the information technology industry away from highly customized independent architectures, which generally drive prevailing prices upward. Cloud computing drives the industry towards pooled resources, shared architectures, flat-rate pricing models, and pay-per-use pricing models, which generally lowers prevailing prices.

An early 2009 Booz Allen Hamilton study concluded that a cloud computing approach could save 50–67 percent on the lifecycle cost for a 1,000-server deployment.