The Cloud Changes the Cost Landscape
Compare and contrast CapEx and OpEx models and learn what financial advantage the cloud brings.
We'll cover the following...
Capital assets
Once upon a time, to use computing resources, you had to own them physically. We had to buy expensive mainframes, minicomputers, or servers and keep them safe and sound in a data center with a raised floor, countless cables, and cooling and fire suppression systems. Because this equipment was expensive, sometimes millions of dollars, we treated it just like any piece of machinery we needed to buy to produce our products.
Because these were big investments, we expected to be able to use them for years and years. In accounting terms, we call this type of thing a fixed asset. It just kind of sits there, fixed, and does its job over the course of several years—something referred to as a useful life. That useful life is usually determined by an amortization schedule, which is another accounting term allowing companies to steadily decrease the book value of that fixed asset as it gets older and presumably less useful to the business.
Let’s say we operate a candy factory and purchase a chocolate enrober, which is a machine that coats stuff with chocolate. It cost us $1 million, and we decided that its useful life is five years. Now, although we don’t anticipate selling it, we have to account for its decreasing value over time due to its fixed asset status.
To accomplish this, we decided to decrease its book value—the value that we assign to it on our accounting books—by $200,000 every year. So, at the end of five years, at least on our accounting books, it would be worth $0, and we’d likely go shopping for a new ...
