The top 50 public software companies that are heavily invested in cloud infrastructure have lost $100 billion in market value collectively, due to the technology's impact on profit margins.
This is one of the conclusions of a new report from US venture capital firm Andreessen Horowitz, which states that while cloud has been revelatory for many businesses, there is a significant caveat that companies struggle to foresee.
The caveat revolves around the cost of running cloud infrastructure as businesses grow and scale. While firms remain small, cloud is a great solution; it’s available immediately, at exactly the scale the business needs, resulting in more efficiency in both operations and economics. “The cloud also helps cultivate innovation as company resources are freed up to focus on new products and growth,” the report states.
However, as businesses grow, so do cloud costs, and they soon start adding up. The excess cost of cloud ends up affecting market cap, as it drives lower profit margins.
Some businesses have even started moving back to on-prem, as a result. Some are doing so across the majority of their workloads, while others are opting for a hybrid approach.
“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 its infrastructure optimization overhaul, the majority of which entailed repatriating workloads from public cloud,” the report claims.
The problem spans many different industries, not just software companies, Andreessen Horowitz concludes. The firm estimates that the total impact of the problem is potentially greater than $500 billion.
To tackle the issue, cloud needs to be better optimized, “whether through system design and implementation, re-architecture, third-party cloud efficiency solutions, or moving workloads to special purpose hardware".
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