In this lesson, we're going to explore identifying the differences between capital expenditure and operational expenditure, and understanding the consumption-based model. If we go and look at the breakdown of, again, those skills assessed, what we're looking at here are these second two in this video. That's what we're actually going to cover in this particular video. Now, if we think about capital expenditure, That's the idea of purchasing an asset up front. This could be a server, it could be a storage rate, it could be networking equipment.
So I'm purchasing a certain asset that's giving me some of that capacity on which I can run services. Now it could also be licensing, but I'm pre-purchasing something that I plan to use for a certain period of time. So capital or capex...
is really something we typically think about as for on-premises. We're purchasing some asset that we need to use for a certain amount of time to make that purchase worthwhile, then we depreciate it over a period of time. Operational expenditure, or OPEX, is really what we think about with things like the cloud. This is where we're not... Purchasing it upfront, we're purchasing the resource, the service as we use it.
There's no upfront cost. It's just consumption based. This is how we buy services in the cloud.
And if we think about the difference between those, a capex, I need all that money up front. I have to be able to purchase all of that. So that's a big upfront expenditure.
And I have to have a really good idea. What am I going to be doing a year down the line, three years down the line? Because I'm purchasing this piece of equipment that has to last a certain amount of time.
That's pretty difficult in today's times. The amount of innovation we have to feel confident. Hey, I'm buying this thing. I know I'm going to keep using it. So many companies get stuck with hardware or licenses.
They spend a huge amount of money on a license. Well, their needs change. but I can't react.
With OPEX and the cloud, I'm paying for what I need at that moment in time. And I can be super flexible and change my mind on that. So OPEX enables better management of the costs. And it can even help in terms of net profit for the organization because I'm paying as I'm using it. As I get more successful, well, sure, I might need more resource, that scalability.
But I'm being more successful, so I've got more money coming in, so I'll pay for the resource I need to be more successful. For companies that are starting out, the old days of this capital expenditure to stand up all of the infrastructure required could destroy a company. With OPEX, as a starting out company, I don't have some huge initial outlay.
And if I'm successful as I grow, my bill goes up, but I'm being more successful, I'm okay doing that. And that OPEX really does lead in and is a key part of this consumption. So this is consumption-based.
That's the whole point. As I'm using a virtual machine, as I'm using a container, as I'm writing bits to disk, I'm consuming that service and I pay for what I am consuming. Now, different types of service may bill with different units. Maybe it's just based on capacity.
Maybe it's transactions. Maybe it's just a certain unit of size. It's going to vary whatever is more logical for that particular service. But the key point is I pay for what I'm actually using. I'm not having any of those upfront costs.
I'm not buying infrastructure. I'm not buying licenses. I'm just paying for what I need at this moment in time.
So it's really great for me as an organization that I'm not potentially stifling future innovation by saddling myself with some set of assets. And because I spent so much money, I have to make sure I keep using them. Because I'm paying for what I use, once again, I can be very flexible.
If I'm using more, I pay more. If I'm using less, I pay less. And that actually gives me a lot of capability.
Yes, services will use autoscale. They can add and remove instances constantly based on the amount of work that I currently have at any moment in time. But that consumption-based nature really opens the cloud up to a lot of unique scenarios that would be very hard to match on-premises.
If you think about this picture I drew with this variability, that maybe again is a day, a week, a month, a year, multiple years. But any scenario where it's not just some flat line, that ability to only pay for what I'm using at that moment is huge. Now that scenario could be something like, hey, it's on and it's off. It might look like that. Maybe it is that tax system that runs for two months out of the year.
Maybe it's an election system that runs for a few months every four years. If I have a scenario where, for example, hey, I'm just growing very fast. Oh, that's great here because my initial outlay is small.
But as I grow, hey, I'm going to pay more, but my business is doing well. If there is any kind of unexpected, hey, I'm running standard, oh, and I get this huge bump, and then I go back to normal, I can react to that. I'm paying for what I'm using. So any place I have some variability, this consumption-based nature of the cloud is really critical to lighting up and being very efficient in my scenarios.
So CapEx, I'm... purchasing some asset and I need to use it for a certain lifespan. And it can really stifle my ability to innovate because I have to keep using it. OPEX is my operational expenditure. I think about things like the cloud.
That's all consumption based. I pay for what I use as I'm using it, which really gives me a lot of flexibility anytime there's some variability. But honestly, moving to the cloud might just be cheaper anyway. Because of the economics of the huge scale of these cloud services, they can likely run those services cheaper than we can in our own data centers.