In order to understand the Cloud business model (which is a form of vertically integrated resource provisioning) we have build a spreadsheet that enables us to simulate an entire Cloud infrastructure business. This simulation model is based on the pricing from AWS EC2, contains real hardware prices supplied by vendors, as well as correct pricing from data center facilities.
The aim was not to create a perfect simulation, but to get a better understanding of the profitability and enable us to test various to gain insights.
A key conclusion we made, is that any Cloud infrastructure operator is gaining substantial returns from the primary capital good (IT server equipment). At a annualized average utilization rate above 30% the business is profitable. It is the most profitable way to allocate cash, especially for cash-rich global cloud providers. Due to the fast depreciation of the paper value of the IT equipment (usually 3-5 years), its an unattractive investment for most investors who rather focus on low-margin data center facilities. However, as this model shows, extending the lifetime of the servers is viable and leads to significant returns.
Cloud Business Model v4 You can download our simulation model below. Download the spreadsheet