Cloud price wars: How low can they go?

small__7349905590Amazon Web Services (AWS), Google, and Microsoft have been waging a price war in cloud compute, network, and storage services that has taken on drumbeat predictability. You can safely bet that when one drops prices, the others will follow in lock step. The question for customers is how low can they go?

The last major tussle saw AWS announce a wave of heavy discounts on its Reserved Instances, in retaliation to Google’s decision to slash prices by 10 percent across the board on the eve of Amazon’s re:invent conference.

“Lowering prices is not new for us,” said Amazon Web Services Senior VP Andy Jassy at the AWS Summit in San Francisco earlier this year. “It is something we do on a regular basis. Whenever we can take costs out of our own cost structure, we give them back to our customers in the form of lower prices. We should expect us to continue to do this periodically.”

The race to the bottom


Analysts agree the “cloud price wars” in the infrastructure as a service (IaaS) are unlikely to let up in the near term as the combatants battle for market share. AWS, Google and Microsoft all believe cloud infrastructure pricing should mimic Moore’s Law, decreasing exponentially as the cost of hardware capacity decreases, said Lynda Stadtmueller, Vice President of Cloud Services at Frost & Sullivan. Rather than trying to become the lowest-cost provider, the companies will just argue that they’re passing on their own operational cost savings to customers, she said.

“[The price wars] are unlikely to ever end unless Moore’s Law comes to an end and is not replaced by another efficiency/cost savings paradigm,” agreed Holger Mueller, Principal Analyst and VP of Constellation Research Inc. “It’s like gas stations (ultimately) having to lower prices at the pump when crude oil prices fall.”

Despite frequent price drops, the major cloud players still have a ways to go to convince enterprise’s to bet big on cloud. Research firm International Data Corp. estimates that businesses will spend $100 billion on cloud computing in 2014. That isn’t exactly small change, but it doesn’t compare to the $2.1 trillion that IDC says businesses spend on IT in a single year. The big three cloud vendors have a simple strategy: Make the cloud too cheap for enterprises to ignore.

“The focus on price is a smart marketing tactic by AWS to build and protect its superior competitive position in the IaaS market,” said Stadtmueller.

Krishnan SubairamanFor Krishnan Subramanian (pictured right), Founder of Rishidot Research, the cloud price wars are largely about gaining enterprise market share by attracting developers into the fold.

“Reducing the barriers to entry for startup developers and enterprise developers wanting to gain access to cloud resources bypassing their IT, will help these companies gain foothold in the enterprise,” Subramanian says. “They are not done yet; it will go on till the prices go closer to free.”

The paradox of this phenomenon is that for many enterprises the cost of cloud infrastructure is the least of their concerns. Stadtmueller cited a 2014 Frost & Sullivan survey of IT decision makers, in which “low price” ranked as the 11th most important driver for the selection of an IaaS provider. More pressing concerns included compliance, ease of migration, integrated platforms, service level agreements (SLAs) and security.

“Of course, costs are still important to enterprises, and cost reduction remains a top driver in the decision to move workloads from the private data center into the cloud,” said Frost & Sullivan’s Stadtmueller. However, Mueller of Constellation Research maintained that cost becomes relevant only when services are similar.

“At this point there is too little functional differentiation around services, location and other areas to justify a premium for a certain cloud provider,” he said.

Cheap clouds pave the way for innovation


small__9234837578For the most part, analysts agree that enterprises are benefiting from the price wars, which have the ancillary benefit of also driving enhancements to cloud providers’ service portfolios.

“As long as the SLAs are held up, there is no downside,” said Mueller. “Let’s not forget that all IT innovation has been triggered by cost savings and/or flexibility savings.”

Some customers have been eager to take advantage. Last July, the file-sharing service Box, Inc. announced that it would no longer place capacity limits on storage for its business customers. Box CEO Aaron Levie said the move was only made possible due to “an arms race of gigabytes”, between AWS, Google and Microsoft.

There could be some potential pitfalls though. Subramanian argues that the specter of vendor lock-in could rear its ugly head if an organization throws in its whole lot with one cloud provider. He said that while smart organizations will leverage the commodity pricing of infrastructure services and use open source software to avoid lock-in, not everyone has the capabilities to do this.

“Ultimately, these cloud providers will monetize higher order services rather than infrastructure services,” he said, referring to such services as Google’s App Engine and AWS’ Kinesis or Lambda. The results is that some companies could “end up paying big for higher-order services through lock-in costs.”

In order to avoid this fate, Subramanian said organizations need to ensure loose coupling between services so that portability is not expensive. Alternatively, organizations could use open source frameworks on top of public clouds for developer platforms, for example.

“With the emergence of [the container technology] Docker, the risks associated with lock-in is reduced,” Subramanian said. “In short, if you are planning your IT strategy on public clouds, be smart about it and take a long-term view to avoid lock-in.”

There’s also the danger that as AWS, Google and Microsoft price alternative vendors out of the market, the lack of competition could one day stifle innovation in public IaaS itself.

AWS, Google and Microsoft will be “a triumvirate at the heart of the cloud-dependent future, collectively providing the lion’s share of the low-cost computing and storage capacity that will support the next generation of technology,” said Stadtmueller. “It remains to be seen whether the leaders will sustain the pace of cloud innovation, or defer to value-added service providers.”

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