Beware: Amazon Cloud cost can ruin startups

Cloud services are supposed to be many things, but chief among them may be cost-effective. And good for startups. Except when it isn’t and that is today’s story.

Using the cloud is widely considered to be less expensive than staffing your own data center, but some Amazon Web Services customers are discovering just the opposite and are abandoning or cutting back on their AWS usage.

After founding the company atop AWS, a fast-growing Seattle company decided build their own data centers instead.

“We create a lot of our own data at Moz, and it takes a lot of computing power,” wrote Moz CEO Sarah Bird on the company blog.  “Over the years, we’ve spent many small fortunes at Amazon Web Services. It was killing our margins and adding to product instability. Adding insult to injury, we’ve found the service… lacking.”

Beginning in 2012 and continuing in 2013, Moz built its own data centers in Washington, Virginia and Texas.

“This was a big bet with over $4 million in capital lease obligations on the line, and the good news is that it’s starting to pay off,” Bird wrote. “On a cash basis, we spent $6.2 million at Amazon Web Services, and a mere $2.8 million on our own data centers. The business impact is profound. We’re spending less and have improved reliability and efficiency.”

Moz CEO Sarah Bird

“Our gross profit margin had eroded to ~64 percent, and as of December, it’s approaching 74 percent. We’re shooting for 80+ percent, and I know we’ll get there in 2014,” she concluded.

Moz hasn’t totally abandoned AWS, and does not plan to, according to Moz CTO Anthony Skinner, who wrote in Hacker News that his company still expects to spend as much as $1 million annually on AWS.

“To be clear, we haven’t dumped AWS for short running stateless processing,” Skinner wrote. “We dynamically spin up spot instances as needed for all our stateless processing using AWS and other cloud services. At our current size our AWS bill will not be $7 million but closer to $500k-$1 million a year. Not exactly pocket change. Some of the cost savings we are realizing is due to working with AWS as well on best practices.”

“For our longer stateful processing or apps that need to be available 24/7 with no variability in load we have purchased our own hardware (a process that has been going on for over 18 months). Owning the equipment plus the data center will run us approx 1.2 million including growth to build a hot back up,” Skinner went on.

Here’s a surprise: staffing cost was not a factor in Moz’s decision. “We must have staff to manage 1000s of servers at AWS or at our own data centers. The biggest factor was paying for compute on boxes that crashed and yielded nothing we could use to move our business forward.”

Moz is not alone in reconsidering its AWS investment. Geekwire tells the story of another company with similar concerns.

“The cloud is attractive because I can spin up my Web site in four hours,” Eamon Gavin, director of network and data center operations at told Geekwire. “Well, great, after 30 days you’ve cost me $1 million because of the traffic and the bandwidth that’s coming into that cloud environment because you didn’t understand.”

“We see that all around town, people who have deployed Amazon, and they are like holy s—: ‘I’ve got to bring this all back in house, because we can’t afford this.’”

My prediction that data centers will be replaced by the cloud and will close should have said “corporate” data centers, to avoid confusion with online services providers. While many will be able to move almost totally to the cloud, others will find it less expensive to do-it-themselves.

{Editors Note:  We were contacted by Amazon AWS representatives about this post. Amazon objected to the title and pointed out that AWS is used to power many startups. We fully acknowledge this is the case.  However, after discussing the matter with the editorial team we have decided to leave the title unchanged. We realize the title is perhaps a bit controversial and we will endeavor to remain balanced yet objective in our coverage going forward and will try to avoid sensationalism. We invite AWS and others to comment on this post and convey their angle. }

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