A Hidden Risk for Amazon’s Cloud Business

Public cloud platforms like Amazon‘s (AMZN 0.65%) AWS has really changed the game for startups. Rather than having little choice but to own and operate your own servers, the cloud makes it easy to provision resources quickly and on-demand. A sudden increase in usage can cripple a physical server, and scaling requires upgrading hardware or setting up additional servers. In the cloud, resources scale seamlessly to handle any amount of traffic.

This convenience and scalability comes at a price. Cloud computing is not cheap. The price is often worthwhile for companies that scale quickly or face extreme spikes in usage. It makes perfect sense for Netflix Run entirely on AWS, as usage can skyrocket at peak times or when a new season of a hit show is released. Netflix couldn’t have grown as quickly or invested as heavily in content if it had been frantically expanding its own infrastructure.

The cloud has disadvantages

There are many companies that never made the leap to the cloud, but there aren’t too many that were born in the cloud and then made the leap to running their own servers. Any kind of migration is an ordeal, and to run your own hardware you need to hire people to manage that hardware.

But for a company that’s reached a decent size, with stable and predictable growth, and little chance of a sudden spike in usage, cloud computing is almost certainly far more expensive in the long run than running an on-premises infrastructure. Renting is always more expensive than buying.

The benefits of the cloud partially disappear when a midsize to large enterprise doesn’t need to rapidly scale resources up and down. The cloud is in some ways easier than running servers, but it’s not guaranteed to be easier overall. Netflix, for example, still spent nearly $2.3 billion on payroll and related expenses for employees responsible for the technical side of the business last year. This number does not include actual cloud computing costs.

Earlier this month, email startup HEY co-founder David Heinemeier Hansson published a blog post explaining that the company is transitioning from a cloud-only infrastructure to its own hardware. The cloud made sense for HEY when it launched two years ago, but the company has since reached decent scale and largely predictable growth.

As businesses grapple with an economic downturn and a potential recession, cloud computing bills should come under closer scrutiny. HEY spends half a million dollars annually on AWS database and search services. “Do you know how many insanely powerful servers you could buy on a budget of half a million dollars a year?” asks Hansson in his blog post.

Running these servers at near 100% utilization would be far cheaper than renting the same amount of resources from AWS. And moving from the cloud probably wouldn’t be any more complicated or result in higher operational costs. “Anyone who thinks it’s ‘easy’ to run a large service like HEY or Basecamp in the cloud has clearly never tried it… I’ve never heard of organizations our size that have been able to run their significantly downsizing the operations team just because they moved to the cloud,” said Hansson.

A crack in the cloud growth story

Cloud computing is going nowhere. Cloud platforms are ideal for many types of businesses and offer benefits that on-premises hardware simply cannot. Cloud computing will almost certainly continue to eat up a growing share of global IT spending.

But there are probably many companies like HEY looking at their cloud computing bills and wondering if there’s a better way. There are likely many companies that are beginning to feel the sting of high inflation and economic uncertainty and are actively looking for ways to reduce costs. For any business that doesn’t benefit much from the scalability of the cloud, a high cloud computing bill is an obvious goal.

Whether HEY’s move is the start of a trend or an anomaly is hard to say. But there’s clearly resistance to the idea that the cloud is the answer for every business. AWS competes with countless other cloud platforms, but it could increasingly compete with the realization that cloud computing isn’t all it’s supposed to be.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.