The battle for cloud dominance is making the Cold War look like child’s play. Amazon Web Services wasted no time in responding to Google’s price cuts, opting to slash the base price of its infrastructure and computational services by 51 percent.
Amazon, the market leader for hosted infrastructure, has already engaged in a tit-for-tat price battle with Microsoft and its Azure service. The result has been a progressive lowering of the bar for basic cloud services, including those supporting third-party cloud application services.
The Amazon volley back at Google reduces base cloud prices by one-half, and will reduce other services by 28 percent to 61 percent. Google implemented a one-third price cut for its infrastructure and cloud storage services.
Microsoft, which rebranded its cloud service “Microsoft Azure” from the former “Windows Azure,” implemented similar price cuts earlier this year. There’s a high likelihood Microsoft will follow Amazon and Google to remain competitive.
The pricing wars among the top contending cloud providers is pushing prices progressively lower. Overall, cloud service fees have been dropping 6 to 8 percent annually, and the base price for cloud storage has plummeted do less than 3 cents a gigabyte per month.
At this rate, cloud services will be free or, in a topsy-turvy world, companies like Google and Amazon will pay customers to use their cloud services. According to the research by The 2112 Group, 8 percent of solution providers are already selling cloud services at a loss, and most are earning less than 5 percent margins on cloud products.
Amazon, Google and Microsoft are locked in this cloud pricing war just as other major players are ramping up their efforts to enter the market. IBM is investing $1.2 billion to expand its cloud services infrastructure capacity. Cisco Systems this week announced a $1 billion investment to develop a global cloud services network. And scores of other companies ranging from AT&T, Comcast and CenturyLink are pushing out new cloud services and capabilities.
The pricing war and the speed of competitive responses to fee cuts is sending the wrong message to the market. It tells customers that cloud providers and their go-to-market partners know the prices and margins are too high and have plenty of room to negotiate price. If a customer is buying cloud services over the counter, the price will remain whatever is listed on the menu. But, if the customer is buying enough services and has negotiating power, the price war is giving it ammunition to push back and demand even deeper concessions.
Cloud providers are telegraphing their next value-proposition, and it has nothing to do with the bare-metal servers in the cloud. Along with the price cuts, Amazon released “Amazon WorkSpaces,” a new service that gives users a “desktop-like” experience for accessing applications from any machine.
IBM and Verizon are pushing similar concepts in certifying applications for their cloud services. At its partner conference earlier this year, IBM announced that more than 40 of its applications had been certified for use on its SoftLayer cloud service. Verizon is certifying third-party application for optimize use on its Terremark cloud. And AT&T has an entire development division to build application programming interfaces to ease the use of third-party apps on its cloud network.
Through these price wars, cloud providers are telling the market that hosting and infrastructure services, much like the hardware they’re built on, have no intrinsic value. The true value will come from the applications and workloads place on those virtual resources. Unfortunately, constant price cuts will condition the market to think that even these value-add assets should come at a lower price.
The net result: An expediting of cloud commoditization.
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