Understanding Cloud Data Center Economies of Scale

James Hamilton’s recent MIX’10 presentation on economies of scale for large cloud providers was quite impressive. James “gets it” like few others in the industry. If you haven’t watched his hour-long presentation, I suggest you do. I also recommend this excellent response from James Urquhart. My goal in this posting is to highlight, clarify and expand on a few of James Hamilton’s points. I will focus on Infrastructure-as-a-Service (IaaS) clouds, but the concepts are relevant for other kinds of cloud services.

In his presentation, James focuses on power: utilization, distribution, etc., and while an important element, like him, I don’t think it’s the most important factor.

I also want to dispel the myth that only the largest companies can achieve these economies of scale. Don’t get me wrong; providing a cloud service is a scale game. It requires a certain amount of buying power to compete. However,you don’t need to be MSFT, YHOO, AMZN, or GOOG to compete effectively. Buying power can be had at levels much lower than you might think.

In this article, I refer regularly to Jame’s comments in his presentation, so I suggest you watch his video first. In order to minimize confusion, I’ve borrowed some pictures from his slides and inserted them here for your reference. This is a long entry, but it will be worth the read as I’ve got numbers for you which I hope you will find interesting.

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