In the last couple of years, there has been talk of a significant increase in companies’ costs for cloud services. In the USA this is referred to as “Cloudflation”- in Norwegian; Skyflasjon. Cloudflation leads to the emergence of hybrid models. There are several reasons why Norwegian companies are now experiencing Skyflation. Here are some of them.
Cloud services from the major providers have so far been underpriced
It is a fact that the major providers such as Microsoft, Amazon and Google want increased profitability on their cloud platforms such as Azure, AWS and Google Cloud.
Since 2006, when Amazon first launched their cloud platform, AWS has changed the price over a hundred times. On the Google Cloud platform, you have traditionally received credit points as a new customer. The “first dose is free” principle applies here. We now see that prices are on the way up and initial bonuses have been reduced for many customer groups. Microsoft increased its prices for licenses earlier this year. For example, prices rose in March 2022 for the Office365 package by between 9 and 20%, depending on the type of program you are on.
Strategic pricing of cloud services to gain market share is already more or less history. We have reached a point with a critical mass where profitability is now the focus. Then the prices go up. The economies of scale achieved over time with an ever-growing customer base also appear to have been taken out at this stage and will therefore not affect pricing in a positive direction for customers. A strong dollar against a weaker Norwegian krone obviously does not make matters better.
Lack of discipline, good order and control means that costs run wild
Many companies that invest in running all of their IT systems in the cloud have an expectation that they will save costs by reducing the number of heads in the IT department. However, it turns out that a reduced need for IT technicians is offset by the need for competence and resources in management and control over the company’s IT strategy and operations.
Many companies also get a shock when the invoices for the use of data arrive. This particularly applies in cases where there is a lot of data that is uploaded to the cloud and must be retrieved again or you run backup and storage of large amounts of data that are transferred between the users and the cloud solution. It is usually very reasonable to upload data, while the taxi meter runs hot when you have to take it out again.
One of the challenges in keeping IT costs under control is that the distinction between the IT department and the finance department is too sharp. Especially in companies with a strong focus on application development and with a fast “time to market” perspective. It is so incredibly easy and quick to book resources in the cloud. That is also part of the point of using it. There is, however, a great danger of overbooking the resources and ending up with a higher cost than necessary. Furthermore, it is difficult for a company, which has relied on cloud services in a phase where it was optimal in relation to simplicity and pace, and should adjust to take control of their own infrastructure. Although from an economic perspective it would be the only right thing. Hardware costs, costs for expertise and the risk of service downtime in the migration process will prevent a decision to take things out of the cloud. At the same time, an admission that the cloud might not be the solution to all IT challenges after all, will sit far behind for many.
Another obvious cause of cloud inflation is of course the extreme electricity prices
Electricity prices have risen sharply – especially in the last year. This applies to most countries in our part of the world where cloud services are produced. Because even if we talk about pushing IT services into the cloud, these services are produced on the ground in a data center. In the data centre, electricity is used for computers and IT equipment and electricity is used to ensure a working temperature they can live with.
For providers of cloud services, a doubling of electricity costs hits hard. The majority of data center operators in Norway have traditionally bought electricity at the spot price and invoiced their customers with a surcharge for cooling and administration. A few years back, when the electricity price hovered around 30 øre, this was not such a big issue and did not make up much of the total production cost. Many people now find that electricity costs are the largest item in the spreadsheet. This cost must be taken back in and then increased prices for the end user is the most likely result.
It is therefore more important than ever for data center operators to be as efficient as possible. You have to make it more efficient and save electricity in every possible way by adopting new technology and testing new innovative methods to reduce costs.
Increase in hybrid models
As mentioned earlier, we see that some IT systems “fall out of the cloud” because they either become too expensive to have there, or they have to be operated locally due to challenges with compliance, legislation, etc. The alternative is therefore to establish a private cloud next to the services you buy in Azure, AWS, Google, etc. Then we are back to good old Co-location in a local data center where you achieve good connectivity along with high uptime. The systems are often operated by a third party. In addition, it is possible to buy electricity at a fixed price for various terms in the future. Then you have all the prerequisites to maintain good control and predictability of the company’s IT costs.
Taking back parts of one’s own IT infrastructure to reduce costs from an increasing cloud service price is going to increase in trend going forward. We believe that the enormous pressure from the large consulting companies to get absolutely all of their customers’ IT needs up in the cloud will turn more in the direction of a more optimized portfolio where you balance between which parts of the IT needs should be in the cloud and what you should take control of yourself.
Nordic Hub Data Centers has a continuous focus on innovation and good solutions for optimal operation
We at Nordic Hub Data Centers work continuously to optimize operations in our data centres. A good balance between IT load and cooling, optimization of cooling with the reuse of excess heat and a focus on upgrading those parts of the infrastructure where we can extract savings, even if they may apparently be marginal, are important elements of our strategy.
To name an example, our prototype of a plant wall inside a computer hall is an element of this strategy. Correct humidity is important to reduce the build-up of static electricity and increase the cooling effect in a data centre. By using plants instead of the traditional humidifiers, we reduce the use of electricity to boil water into steam. In addition, the plants bind dust while reducing noise from computer equipment which is a nuisance for operating personnel.
Dielectric cooling is another example. This is cooling based on the computers being immersed in a non-conductive liquid instead of being cooled with cold air. With this, you achieve a very good cooling efficiency, it is easier to utilize excess heat, and such a solution makes significantly less noise.
By placing our data centers close to cities, NHDC benefits from higher uptime, delivery of district heating, shorter travel distance for personnel and lower costs for our customers.