rebuttal to "Diseconomies of Scale"

Posted in review, Technology trends at 8:44 pm by ducky

Ken Church and James Hamilton have a blog posting of Diseconomies of Scale which doesn’t seem right to me.

They suggest that it is more expensive to run a data center than to buy a bunch of condos, put 48 servers in each, wall up the servers, rent out the condo, and use the servers as a distributed data farm.

Capital costs

Church and Hamilton figure that the capital cost of a set of condos is about half of the cost of a data center.  However, they use a sales price of $100K for the condos, but according to a news release issued by the US National Association of Realtors, the median metro-area condo price in the US was $226,800 in 2007 Q2.

Perhaps you could get cheaper condos by going outside the major metro areas, but you might not be able to get as good connectivity outside the major metro areas.  I don’t have a figure for the median condo price in cities of population between 50,000 and 100,000, but that would be an interesting number.

A rack of 48 servers draws 12kW (at 250W/server, his number).   For a house wired for 110V, this means that the current draw would be 109A.  That is approximately five times what a normal household outlet can carry, so you would need to do significant rewiring.  I don’t have an estimate on that cost.

Furthermore, my construction-industry source says that most houses can’t stand that much extra load.  He says that older houses generally have 75A fuseboxes; newer houses have 100A to them.  He says that it is becoming more common for houses to get 200A fuseboxes, but only for the larger houses.

While it is possible to upgrade, “ the cost of [upgrading from a 100A fusebox to a 200A fusebox] could be as high as $2000.”  I suspect that an upgrade of this size would also need approval from the condo board (and in Canada, where residential marijuana farms is somewhat common, suspicion from the local police department).

If, as Church and Hamilton suggest, you “wall in” the servers, then you will need to do some planning and construction to build the enclosure for the servers.  I can’t imagine that would cost less than $1000, and probably more like $2000.

They also don’t figure in the cost to pay someone (salary+plane+rental car+hotel) to evaluate the propterties, bid on them, and buy them.  I wouldn’t be surprised if this would add $10K to each property.  While there are also costs associated with acquiring property for one large data center, those costs should be lower than for aquiring a thousand condo.

Bottom line: I believe the capital costs would be higher than they expect.

Operating costs

For their comparison, Church and Hamilton put 54,000 servers either in one data center or in 1125 condos.  They calculate that the power cost for the data center option is $3.5M/year.  By contrast, they figure that the condo power consumption is $10.6M/year, but is offset by $800/month in condo rental income at 80% occupancy, for $8.1M in income.  I calculate that 800*1125*12*.8 is $8.6M, and will use that number, giving a net operating cost of $2M/year, or $1.5M/year less than a data center.

Given a model with 1125 condos, this works out to $111 per condo per month.   Put another way, if they are off by $111/month, a data center is cheaper.

Implicit in their model is that nobody will ever have to lay hands on a server rack.  If you have to send someone out to someone’s residence to reboot the rack, that will cost you.  That will depend upon how far the condo is from the technician’s normal location, how easy it is to find the condo, how agreeable the tenant is to having someone enter their condo, etc.  I believe this would be a number significantly larger than zero.  You might be able to put something in the lease about how the tenant agrees to reboot the servers on request, but this inconvenience will come at some price.  Either it will come in the form of reduced monthly rent or a per-incident payment to the tenant.

I believe that the $800/month rental income ($1000/month rent less $200/month condo dues) is overly optimistic.

The median rent for a metro-area apartment was $1324 in 2007, but that’s for all housing types, not just condos.  The median rent nationally in 2007 was $665.  If you want the metro income, you need to pay the metro purchase price of $227K; if you want to save money by going outside the metro areas, you won’t get the high rent.

Eyeballing a few cities on Craigslist, it looked to me like the metro rent for two-bedroom condos was about $800/month.

Church and Hamilton also didn’t account for

  • management fees (~5-7% of gross rent per month, or $50-$70 on income of $1000)
  • property taxes (~2%/year of purchase price, so $160/month if he finds condos for $100K)
  • maintenance that isn’t covered by the condo association like paint, new carpeting, and the hole the tenant punched in the wall ($40/month)
  • reduction in rent for part of the condo being walled off and/or inconvenience of rebooting the servers (~$50/month)
  • Liability insurance. If a short in the servers burns the condo complex down, that’s bad.
  • Internet connectivity

While they didn’t account for Internet connectivity in either the datacenter scenario or the condos scenario, this is an area wherethere seem to be large economies of scale. For example, a T3 (44.736 Mbit/s) seems to cost between $7,500 and $14K/month or between $167 and $312/Mbit/sec/month.  A T1 (1.536 Mbit/s) seems to cost between $550 and $1200/month or between $358 and $781/Mbit/s/month.  The T1 is thus about twice as expensive per byte as the T3.   I don’t know how much connectivity 54,000 servers would need, but I expect it would be significant, and expect that it would be significantly more expensive in 1125 smaller lots.


I can imagine there some significant additional costs in time and/or money.

  • Obstreperous condo boards.  If the condo board passes a rule against having server farms in your unit, you’re screwed.
  • Obstreperous zoning boards.  If the city decides that the server farm is part of a business, they might get unhappy about it being in a building zoned residential.
  • Criminal tenants.  What’s to stop your tenants from busting into the server closet and stealing all the servers?

Church and Hamilton close their article by saying, “whenever we see a crazy idea even within a factor of two of what we are doing today, something is wrong”.  I think they are correct, and that their analysis is overly simplistic and optimistic.

Comments are closed.