Are Data Centers Cheaper Than Cloud?

A new report by McKinsey unveils new insights.

Is cloud computing more expensive that running your own data center? It can be for larger users, according to McKinsey & Company, which says that a typical corporate data center is more economical than Amazon’s EC2 when measured in cost per CPU equivalent. McKinsey detailed its findings in a report released today at the Uptime Institute’s Symposium 2009 in New York, titled ”Clearing the Air on Cloud Computing.”

McKiney’s conclusion runs counter to much of the messaging from the cloud computing industry, which asserts that running applications in a third-party data center with usage-based pricing offers better economics than building and operating a data center.

The cost comparison is one highlight of a broadly skeptical report, which says that cloud computing has tremendous promise, but the growing hype for the cloud could lead to a “trough of disillusionment” for large enterprise users.

In the report, McKinsey claims that while cloud computing has great potential, many of the claims being made about cloud computing have lead some to the point of “irrational exuberance” and unrealistic expectations

“Cloud computing has shown great promise for start-ups and pet projects for large corporations,” McKinsey writes. “However, it is not ready to help with the big challenges of big companies. Cloud computing can divert attention IT departments’ attention from technologies that actually deliver sizable benefits.”

One of the key findings is that cloud computing is approaching the top of the Gartner Hype-cycle – a cycle that explains how expectations tend to get over hyped by the early providers of the technology, the media and news outlets.  Gartner currently has cloud computing entering the “peak of inflated expectations” phase of the hype curve.

The report goes on to conclude that cloud computing is most attractive for small businesses and, in fact, most customers of clouds are small businesses.  McKinsey also found that cloud computing services are generally not cost effective for larger enterprises running out of data centers.