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Start-ups rejecting cloud? Is this the canary in the coal mine for midmarket biz?

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Start-ups rejecting cloud?  Is this the canary in the coal mine for midmarket biz?

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.


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