Why Some Startups Say the Cloud Is a Waste of Money

Eric Frenkiel is through with convention and conformity. It was just too expensive.

In Silicon Valley, tech startups typically build their businesses with help from cloud computing services -- services that provide instant access to computing power via the internet -- and Frenkiel's startup, a San Francisco outfit called MemSQL, was no exception. It rented computing power from the granddaddy of cloud computing, Amazon.com.

But in May, about two years after MemSQL was founded, Frenkiel and company came down from the Amazon cloud, moving most of their operation onto a fleet of good old fashioned computers they could actually put their hands on. They had reached the point where physical machines were cheaper -- much, much cheaper -- than the virtual machines available from Amazon. "I'm not a big believer in the public cloud," Frenkiel says. "It's just not effective in the long run."

Frenkiel's story shows that while cloud computing is suited to many tasks -- including getting your startup off the ground or running a modest website -- it doesn't make sense for others. When Zynga's online gaming empire expanded to epic sizes in 2012, the company made headlines in shifting much of its operation off the Amazon cloud and into its own data centers, but smaller operations are making the move too.

Like MemSQL, the ride-sharing startup Uber recently moved most of its tech off the Amazon cloud, according to the company that now houses its physical servers, Peak Hosting. And various others, from analytics outfit Mixpanel to online clothes-trading startup Tradesy, have disclosed similar shifts.

"I don't know how much this is written about," says Kit Colbert, an engineer at VMware, whose software is used by cloud services as well as in private data centers. "Within IT departments, public clouds do tend to get more expensive over time, especially when you reach a certain scale."

Three years ago, Frenkiel and MemSQL tapped Amazon Web Services, or AWS, for the computing power they needed to build and test the software product at the heart of the company, a kind of new-age database. Renting virtual servers from Amazon was more convenient than buying a fleet of physical machines, and the prices seemed reasonable -- not to mention the $10,000 in Amazon credits that MemSQL received through its seed funder, Y Combinator. "When you're lean and just getting started," Frenkiel says, "it's obviously the way to go."

But then, early this year, his Amazon bill started to rise.

MemSQL's database product runs across tens and even hundreds of servers, and as the company started testing the software on an ever larger number of Amazon virtual machines, Frenkiel and company realized the cloud no longer made sense -- at least not for the task at hand.

This past April, MemSQL spent more than $27,000 on Amazon virtual servers. That's $324,000 a year. But for just $120,000, the company could buy all the physical servers it needed for the job -- and those servers would last for a good three years. The company will add more machines over that time, as testing needs continue to grow, but its server costs won't come anywhere close to the fees it was paying Amazon.

Frenkiel estimates that, had the company stuck with Amazon, it would have spent about $900,000 over the next three years. But with physical servers, the cost will be closer to $200,000. "The hardware will pay for itself in about four months," he says.

One of the perks of the Amazon cloud is that you can instantly expand and shrink your pool of machines, paying only for what you need at any given time. That's a great thing if you're building a new company -- or running a website where traffic ebbs and flows. But MemSQL reached the point where its workload was relatively constant, where it was using pretty much the same number of virtual servers around the clock.

"The public cloud is phenomenal if you really need its elasticity," Frenkiel says. "But if you don't -- if you do a consistent amount of workload -- it's far, far better to go in-house."

John Hall, the chief technology officer and technical co-founder at the Santa Monica, California-based Tradesy, recently came to a similar realization. "We've got only seven servers, and we've got a tremendous amount of computing power for the price," Hall says. "Versus what we'd get on the cloud, it's somewhere between 70 and 100 times cheaper."

San Francisco's Mixpanel began on Rackspace, Amazon's main rival in the cloud game, but as its operation began to grow, it too soured on the cloud. The company's main issue was that it was forced to share resources with so many other companies on the Rackspace cloud, a setup that led to serious slowdowns. “We just couldn’t get consistent performance on the machines, because other people were on them,” says Mixpanel founder Suhail Doshi.

It's not an uncommon complaint. In fact, John Engates, the chief technology officer at Rackspace, agrees that some tasks are best handled on in-house hardware (which you can also lease from Rackspace). "Web servers belong in the public cloud," he says. "But things like databases -- that need really high performance, in terms of [input and output] and reading and writing to memory -- really belong on bare-metal servers or private setups."

This is not to say that every growing operation will move onto physical servers. Amazon declined to comment for this story, but its cloud business is booming. The convenience of its services often outweighs the problems. The elastic nature of the cloud is one advantage, but these services can also provide a means of ready backup when data centers go dark.

Geolocation outfit Geoloqi moved off of Amazon in 2011 -- but then moved back a year later. "We reached a point where we needed to be able to scale faster than would have been practical with physical servers," says founder Aaron Parecki, before adding that Geoloqi's new parent company runs everything on the Amazon cloud.

Frenkiel and MemSQL still use Amazon for certain tasks -- their monthly bill has dropped to about $6,000 -- and that's often the case with companies that go physical. In some cases, the cloud works. In others, it doesn't.