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What if They Had a Cloud Pricing War and Nobody Came?

  • May 2014
  • -
  • Frost & Sullivan
  • -
  • 13 pages

Introduction

The big cloud news in early April was the price war being waged among three formidable technology giants. On March 30, 2014, Google made a media splash with its announcement that it was dropping prices for its fledgling infrastructure services (compute and storage) by upwards of percent. The very next day, Amazon Web Services (AWS) responded to the challenge with another price drop of its own—its 42nd price reduction in six years. A few days later, Microsoft matched AWS rates with a
percent price decrease in its Azure infrastructure services.

The three service providers deny an intention to claim the mantle of low cost provider. Instead, each attributed the decrease to its own operational efficiencies. Each described its pricing action in terms of the positive impact on customers and on the growth of the cloud market. And yet, Stratecast research continually shows that price
is not a significant factor in the decision to adopt cloud services, nor in selecting one provider over another. As such, Stratecast remains unconvinced of the wisdom and effectiveness of a race-to-the-bottom pricing war in the nascent cloud industry. In this SPIE, we explore the complex economics associated with cloud pricing. We look at enterprise perceptions regarding pricing, and assess the pricing strategies espoused by AWS, Google, and Microsoft for their public cloud services. Finally, we gaze into our crystal ball and envision the future of a price-driven cloud market.

The Economics

As Stratecast has noted in the past, the business case for providing cloud services can be challenging.2 Providers take on the time- and capital-intense burden of deploying fully-functional data centers, which, in the case of new construction, can take more than five years to become operational. Because the cloud model promises customers access to theoretically unlimited computing and storage capacity, available on-demand, the provider must engineer its centers to the highest levels of anticipated usage. But usage is difficult to predict in a model that supports unfettered elasticity and scaling, and requires no contracts or volume commitments from customers.

Revenue is also difficult to anticipate, given the pay-per-use structure of public cloud services and the lack of revenue commitments. Customers pay no upfront set-up fees, nor do they make term commitments that allow the provider to calculate per-customer profitability by spreading acquisition costs over a certain period of time. In fact, in the hourly pricing model that characterizes leading cloud services, the provider receives the same amount of revenue for providing hours of service to one customer as providing one hour of service to customers—although it will cost significantly more to serve customers. The transactional nature of Web-supported, pay-per-use cloud capacity makes it difficult even to define a customer.

With so many variables to the business model, good data is essential to profitability. Years of experience and high volumes yield the data that can help a provider successfully predict usage patterns, which then allows them to tightly manage capital and operating costs, and accurately estimate revenue. The marginal profits can be passed on to customers in the form of lower prices; subsidize other areas of the business; or be returned to shareholders.

In today’s cloud market, only one provider has the size, volume, and years of data to accurately predict costs and revenue, and thus consistently deliver high levels of profitability from its public cloud services: Amazon Web Services (AWS). With more than percent of the U.S. public cloud market, AWS is able to drive market behavior, forcing competitors into a catch-up position.3 AWS’s power is playing out in the escalating cloud pricing wars.

Table Of Contents

What if They Had a Cloud Pricing War and Nobody Came?
Introduction
The Economics
The Demand
The Providers
Are the Price Wars Effective?
Stratecast - The Last Word
About Stratecast
About Frost and Sullivan

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