Vendors won’t let up in cloud price wars yet, analysts say

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Microsoft raised a few eyebrows earlier this week when it said it was planning to buck the usual trend and actually increase the cost of its cloud services in Australia and Europe, as opposed to slashing prices once again. Microsoft blamed “currency movements” for the move, and as if to emphasize this, has since said it will also be raising prices for Office 365, CRM Online, Enterprise Mobility Suite (EMS) and other cloud services too.

But is this an indication of a slowdown in the so-called “cloud price wars”, which have seen the big three vendors – Microsoft, Amazon Web Services (AWS) and Google – attempt to undercut each other on price on numerous occassions in the last couple of years? And if so, does that mean AWS and Google might also look to increase their own costs too?

Why Microsoft raised the bar

The answer could well depend on where your business operates. Most analysts agree that Microsoft isn’t lying when it says exchange rates are a factor, but there’s a suspicion that other, regional market conditions may have also forced its hand.

“Keep in mind that European laws on data storage could alter market conditions locally,” said Krishnan Subramanian, a well-known cloud pundit who founded Rishidot Research in 2012. “I tend to think that this is a result of regional market conditions, including whether competitors have data centers in certain countries, etc., rather than a trend to increase prices.”

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Exchange rates are the main factor behind Microsoft’s cost increases

Currency issues are still the biggest factor in Microsoft’s decision though, insisted Rob Enderle, Principal Analyst at the Enderle Group. He believes Microsoft’s pricing structure is clearly being driven by the currency changes between countries, noting that this is mirrored by price fluctuations in plenty of other goods being sold in Australian and European markets. “Companies price country-by-country based on competition and exchange rates to keep the balance between growing market share and maintaining margins,” Enderle explained.

Even though Microsoft has deemed it necessary to up its prices for some customers, both analysts agreed that pricing will still play a key role in the cloud land grab for some time to come. Subramanian was quick to point out that the public cloud market is still at its infancy as far as enterprise customers are concerned. As such, the battle to dominate the enterprise will push the big three vendors to engage in further price reductions, Subramanian said,  “at least in the U.S., and probably other markets too.”

Enderle elaborated, saying that pricing is dynamic and has a tendancy to drive or maintain vendor market share in the public cloud. He explained that the faster firms can adjust to those elements the better they will do both competitively and financially over both tactical and strategic time frames.

A ‘Premium’ cloud?

Not all market watchers believe pricing carries such weight however. Zeus Kerravala, founder and principal analyst at ZK Research, told us that the public cloud market is fast becoming saturated with providers, most notably with the addition of telcos, who have jumped into the fray with their own broad sets of cloud services. What with so many options to choose from, price is far being from the only factor customers will consider.

“When it comes to providing services to businesses, to capture share you either need to be lower cost than everyone else or provide a level of service that customers are willing to pay a premium for,” Kerravala explained. “Moving forward, it’s important for Microsoft to price Azure services fairly, but at a premium to Amazon and Google. But it must also ensure it offers a level of service customers won’t get from the other two.”

Microsoft’s price increases might therefore indicate it’s already confident it can afford to charge a premium, at least according to Jeff Kaplan, founder and Managing Director of THINKstrategies. Kaplan said that currency issues may well have been a factor in Microsoft’s action. However, he believes the growing demand for the Microsoft’s cloud platform and IaaS solutions enables it to back off on competing on price, because users recognize the value they get.

“Over the past two years, the IaaS providers have been too focused on competing on price, rather than delivering more value in an easy-to-acquire and use fashion,” Kaplan said.

Customers still win

In spite of Microsoft’s price hike, its maneuvering might yet present an opportunity for some customers to play vendors off against each other and get better pricing. Larger enterprises, in particular, will be able to leverage their size to try to prevent price increases or get a reduced price from a different vendor, said Enderle. Companies will still need to take into account the costs of switching to a new vendor, though.

“Historically, switching costs between cloud vendors is relatively low, at least when compared to typical platform-switching costs, so the ability to play one vendor against another is far stronger here,” Enderle said.

Then again, customers shouldn’t just consider the costs of switching vendors, but also the level of complexity and time it would take to offload their workloads to a different provider, said Holger Mueller, Principal Analyst at Constellation Research.

“Customers should always negotiate on price,” Mueller said. “But remember that loads are becoming sticky, and so they can’t be transferred as easily as before.”

It’s likely that customers will continue to benefit from vendors’ price tussles for some time to come. Microsoft said its price increases in Australia and Europe are simply a way to negate the effects of currency fluctuations – which means it won’t have much impact on the company’s bottom line. More importantly, its prices in the U.S., which is by far the most important cloud market, remain unchanged. Subramanian said in all likelihood Microsoft’s move is just a balancing act, and if anything, it won’t be long before it reduces its cloud prices in U.S. dollar terms once again.

“From my point of view, it is not about whether they should or should not do price reduction,” Subramanian said. “Rather, it will definitely happen because they can and they have the bandwidth for further price reductions.”

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