Economies of Scope

Economies of Scale

Cloud computing providers profit from economies of scale because they have the ability to produce compute capacity more efficient than others could. The up-front fixed costs for a data center are enormous. Hundred millions of dollars are spent before the first byte can be consumed. Only few companies can afford to build and maintain such an IT infrastructure.

This is an argument that I read every now and then within the context of cloud computing and why consuming resources in the cloud would be less costly than maintaining on-site infrastructure (of comparable quality). But there is also another dimension of the cost-savings argument: economies of scope.

Economies of Scope

Economies of scope are “[a]n economic theory stating that the average total cost of production decreases as a result of increasing the number of different goods produced” (Investopedia). A popular example is the fast food restaurant which profits more from selling hamburgers and French fries than from selling hamburgers alone. The reason for this effect is that the restaurant can use its distribution infrastructure for selling different (related) products more efficiently.

Cloud computing is an attractive field of business for companies with a well build-out IT infrastructure. For them, selling computing capacity is like the fast food restaurant selling frying fat along with the French fries.