Margins in the Cloud

Albert Wenger

Historically in the software business high gross margins were considered essential.  It is not clear to me that the same logic will apply for cloud-based services.  Their cost structure might wind up being quite different.  Much smaller development teams can accomplish amazing things on top of a cloud stack substantially reducing the fixed cost component.  On the other hand, COGS may increase significantly as the underlying cloud services are paid on a variable basis.  With that in mind, it could well be that some of the most successful cloud businesses will have small or even tiny margins (just a tiny bit of a mark-up / premium to the underlying infrastructure) but at potentially huge scale!  This is just a short post to help me with my own thinking on this, but I am hoping to dig deeper with some actual numbers and maybe case studies along these lines.

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