The excess cost of cloud weighs heavily on market cap by driving lower profit margins.
As growth (often) slows with scale, near term efficiency becomes an increasingly key determinant of value in public markets. (It is, but we need to consider the broader impact, too.) Because when evaluated relative to the scale of potentially lost market capitalization - which we present in this post - the calculus changes. Yet most companies find it hard to justify moving workloads off the cloud given the sheer magnitude of such efforts, and quite frankly the dominant, somewhat singular, industry narrative that “cloud is great”. Those who have done this have reported significant cost savings: In 2017, Dropbox detailed in its S-1 a whopping $75M in cumulative savings over the two years prior to IPO due to their infrastructure optimization overhaul, the majority of which entailed repatriating workloads from public cloud. As the cost of cloud starts to contribute significantly to the total cost of revenue (COR) or cost of goods sold (COGS), some companies have taken the dramatic step of “repatriating” the majority of workloads (as in the example of Dropbox) or in other cases adopting a hybrid approach (as with CrowdStrike and Zscaler).
Now, there is a growing awareness of the long-term cost implications of cloud. Hence a rewrite or the significant restructuring needed to dramatically improve efficiency can take years, and is often considered a non-starter. Because this shift happens later in a company’s life, it is difficult to reverse as it’s a result of years of development focused on new features, and not infrastructure optimization. However, as industry experience with the cloud matures - and we see a more complete picture of cloud lifecycle on a company’s economics - it’s becoming evident that while cloud clearly delivers on its promise early on in a company’s journey, the pressure it puts on margins can start to outweigh the benefits, as a company scales and growth slows. The cloud also helps cultivate innovation as company resources are freed up to focus on new products and growth. This shift is driven by an incredibly powerful value proposition - infrastructure available immediately, at exactly the scale needed by the business - driving efficiencies both in operations and economics. Not only has cloud already impacted hundreds of billions of dollars of IT spend, it’s still in early innings and growing rapidly on a base of over $ 100B of annual public cloud spend. There is no doubt that the cloud is one of the most significant platform shifts in the history of computing.
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