the topic for our third episode is

capital and operational expenditures

what are the differences and which model

is used in the cloud

and why stay tuned

a learning objective for the third

episode is quite simple we will learn

about capital and operational

expenditure

because expenditure is an action of

spending your company funds

and how your expenditure differs

whenever you're purchasing servers from

the cloud

or for your on-premise environment let

me start with capital expenditure first

in short capex capex basically means

buying your own infrastructure

even though most companies move to the

cloud this model is very often seen even

these days

in capex if you would draw a diagram

showing the cost of running your

infrastructure over time

you would see a very big spike at this

start because in a typical company

environment

when you make a purchase like this you

invest a lot of money

you'll want to make sure that your

investment is future proof

so you will want to buy a bigger server

so that it can fit more applications the

future

you will want to have more modern

motherboards so it can be expanded in

the future

and all of those costs drive the initial

investment higher and higher

but once the initial investment is made

there's a very low maintenance cost

moving forward

because of course you will need to pay

for the power for those servers for the

networking

for some hardware replacements and for

some support stuff

to maintain those servers up and running

buying servers in this model means you

buy a static capacity of the server

but in real scenarios your application

will use that capacity over time

when they grow and grow or more

applications come until they use the

full capacity of the server

as you can imagine all the capacity

until that happens

is wasted additionally because you are

managing your own infrastructure

you'll have a lot of additional

maintenance required while the

maintenance cost is small

you still will be required to hire some

people to manage those

then you will need to provide a stable

power and networking source for your

servers

you will need to replace the hardware

that fails and all the operational stuff

that is required

to manage your own infrastructure so a

capital expenditure is about

being able to commit to resources up

front and make that big

initial investment in the operational

expenditure model

it's about renting infrastructure buying

services

and the cloud perfectly fixed into this

model if we take the same example as

previously

so increasing usage over time if we

would again draw the diagram of the cost

of our infrastructure over time

the diagram would look much different

because we would be only paying for the

what we use

because our cost is solely based on the

usage that means server capacity

always matches what you are using and

therefore there is no

initial investment unless you are

actually buying something

upfront and when it comes to maintenance

in cloud

most of the maintenance is actually

performed by the cloud vendor

you only need to maintain small

operation teams to manage the most

important

tasks around your infrastructure other

than that microsoft manages everything

and this is included in the price when

you're purchasing services

to summarize let me compare the two

first of all

when it comes to capex you have

significant upfront cost

in terms of opex there's none when it

comes to ongoing costs

in capex there's low ongoing costs for

maintaining your infrastructure

in opex this is solely based on your

usage

tax deduction is a tricky topic because

it varies from country to country

but in general the rule is that you can

make deduction over time

when it comes to opex since you're

paying for operations every month you

can make

tax deduction in the same year when it

comes to early termination this is one

of the biggest advantages of operational

models operational expenditure allows

you to cancel

servers at any time if you no longer

need those application

you simply cancel in capex well you own

the server so you cannot cancel anything

you just waste more resources because

the server is underused

as we already mentioned maintenance in

capital expenditure model

is quite significant because you need to

manage your own infrastructure

if you're buying services in operational

expenditure model

you only need to maintain a very small

operation teams

and lastly when you talk about value

over time because you're buying your own

infrastructure

as we all know hardware value over time

lowers

because in operational model you don't

really own any hardware there's no

change in value
you simply can move to the newest

hardware versions of the services

at any time with no additional cost and

those are pretty much the most important

differences

in those two spending models for this

episode again

go to my website to episode 3 check out

the study guide

check out the cheat sheet and try what

you have learned in this episode

by going to the practice test and that's

it for this episode thank you guys for

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