Wednesday, November 18, 2009

Confusing Expenditure and Investment

@jpmorgenthal offers A Better Metric for Analyzing the Value of the Cloud.

I agree that the concepts of ROI (return on investment) and TCO (total cost of ownership) don't really work. One reason is that they confuse expenditure with investment, and ownership with use.

Proper investment is what people like Warren Buffett do - buy a railroad in the hope that it will increase in value. Real estate investors may buy a plot of land, build something on the land, and then hope to get their money back by selling or renting the units.

Buying a car isn't an investment, even if the car salesman says it is, unless you are buying a rare antique vehicle that will appreciate in value. Buying IT is like buying a car - you want a car because it's going to be faster than walking and more convenient than taking the bus. You think about the purchase cost and the running cost, and you consider how much you can afford.

Depending on your lifestyle, you might decide that it works out cheaper to rent a car when you need one, than to own and pay parking charges for a car that sits idle most of the time. Alternatively, if you drive to work every day, it might be a lot cheaper to own your own car. In this context, the purchase of a car might count as an "investment", justified in terms of cost-saving.

Using The Cloud is like having a fantastically good public transport system, so you don't need to buy your own car. The city authority invests in public transport so you don't have to. The private citizen doesn't invest in public transport, just spends money when he uses it. Isn't this what the Cloud is like?

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