Cloud // Platform as a Service
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5/15/2014
09:06 AM
David Fowler
David Fowler
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Beware Cloud Price Wars' Dark Side

As Amazon, Google, and Microsoft keep slashing cloud service prices, smaller vendors and CIOs must both ask: Is it smart strategy to chase the lowest cost?

Having recently finished this year's Boston Marathon, I frequently find myself putting situations into a race analogy. That's what happens when you spend many hours rattling your brain on the roads. In a marathon, a runner will often push the pace to the point where some in the lead pack can't keep up. It can be a way to shake off competition, but it comes at a cost.

On the surface, the ongoing price war among leading cloud providers -- notably Amazon and Google, but with Microsoft also in the running -- seems like an effort to make weaker rivals fall by the wayside. It's just the first sprint by titans focused not on profitability, but on mindshare and customer acquisition. And, lower costs via economies of scale and more efficient operations mean the Big 3 can, in fact, run at this pace for a while, churn be damned.

If I were a betting man, I don't think I'd wager on any of them ceding ground. Charles Babcock dug into Amazon's financials, and the impact of price wars with Google and Microsoft, as Amazon tries to retain its value-leader position. Charles's column gives helpful context, pointing out that while a small percentage of Amazon's overall revenue, AWS is an important piece of its strategic equation, and now faces even greater pricing competition from other heavy hitters.

Bottom line: The cloud is not the core business for any of these three, and they're all big enough, with deep enough pockets, to hang in for the long haul. For CIOs, the temptation to take advantage of dirt-cheap cloud offerings is going to get awfully strong.

But is it smart strategy -- on either side -- to chase the lowest cost?

Slow but steady
Vendors like RackSpace and Softlayer (IBM) have largely decided not to compete on price but rather to build their businesses based on value. In marathon terms, they're dropping off the pace but not out of the race, favoring endurance over speed and hoping customers go their way when deciding between cheap, raw resources and value-added, managed hosting.

Cloud services are what you make of them. For some customers, the barrier to jumping from service to service with each price cut is pretty small. The pricing wars are fine for these shops, which have IT staffs with the skills to follow the discounts. And yes, cloud pricing discounts will help raise the industry's overall profile.

[In the market for a cloudified, connverged datacenter but concerned about lock-in? Our research report Cloud Convergence: 6 Standards That Matter outlines specs to watch.]

However, true, sustainable growth will come only when mainstream, risk-averse organizations feel comfortable putting their day-to-day functions into the cloud. For that to happen, cautious CIOs must believe that providers are more interested in providing great support, security, and services than in grabbing headlines and discomfiting rivals.

For now, organizations doing business with Amazon, Google, or Microsoft are the big winners, and will likely see further reductions. When was the last time your cable or phone company came to you and said, "We're cutting costs by 40%"? I only wish. But the journey to the cloud is a marathon, not a sprint.

The market has a long way to go and as an industry we're just in the early stages.

Price cuts help to differentiate providers focused on volume, driven by providing low-cost cloud infrastructure, from those focused on helping customers get the most out of cloud. Both will have roles to play, but if history is any measure, long-term growth may be dictated not by the amount of low-cost computing power that's available, but by the services, support, and expertise that will make it valuable to businesses.

Providers, think carefully about the message you want to send. And business leaders dazzled by cheap processing and fast spinups, talk to your technical leads about the tradeoffs. In marathons, often the winners are those with not just good speed but also great support teams and coaching.

IBM, Microsoft, Oracle, and SAP are fighting to become your in-memory technology provider. Do you really need the speed? Get the digital In-Memory Databases issue of InformationWeek today.

Dave Fowler is currently vice president of marketing for INetU. Fowler is a veteran of the software industry, with more than 35 years of industry and senior management experience in marketing, product management and development, business development, and sales. His most ... View Full Bio

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Lorna Garey
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Lorna Garey,
User Rank: Author
5/15/2014 | 10:05:18 AM
This is a good point
Imagine if it were ONLY Amazon, or ONLY Google or Microsoft making these huge cuts in an effort to disadvantage competitors that lack the deep pockets to sell at those margins. The other two would be screaming and regulators would be all over this. 

I guess it's akin to buying at a local shop vs. Target or Walmart. Are you willing to pay a bit more to get better service, be more than an anonymous customer, and nurture a richer ecosystem? Or do you just want to run in, grab a bulk package of the exact TP you like, and get out fast for short money?
Charlie Babcock
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Charlie Babcock,
User Rank: Author
5/15/2014 | 3:02:28 PM
Cloud buyers beware
Do we have any guarantees as prices are cut that performance levels have remained the same? What if Google and Amazon load more customers onto multi-tenant hosts, then cut prices? Who's winning in that event? There is no common measure of performance across clouds or cloud providers. Nevertheless, the providers know some customers have been smart enough to benchmark their applications and will notice if they're running slower. So far, no one has sent me a complaint.
Mrjspicoli
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Mrjspicoli,
User Rank: Apprentice
5/15/2014 | 5:25:18 PM
Nothing new under the sun
The same thing happened to long distance and then to IP transit. 

Markets are going to change. 
dfowlerinu
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dfowlerinu,
User Rank: Strategist
5/15/2014 | 10:25:19 PM
Re: Cloud buyers beware
No guarantees.  In fact performance is not even guaranteed or even consistent given the noisy neighbor scenarios.   Buyer beware, or at least validate,  should be the operating model for organizations.  

 

Benchmarking and synthetic transactions are a great way to make sure you are getting what you want. 

But remember...Your mileage may vary.
dfowlerinu
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dfowlerinu,
User Rank: Strategist
5/15/2014 | 10:35:20 PM
Re: This is a good point
Another analogy  is the difference between buying a suit off the rack and getting one taylored specifically for you.  In both cases the basic material is the same but the service provides a more valuable solution.

 

 
AbeG
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AbeG,
User Rank: Apprentice
5/20/2014 | 5:17:20 PM
Are they really the same product?
I have looked into each of these cloud services and I think that they are different products that appear to be the same.  The general impression that I get from cloud services, particularly cloud storage is that it is being used to provide integration of their products, which is sometimes exclusive by design.

For example, Acronis's backup software comes with full support for restoring an entire computer image from the cloud.  The catch is that the only cloud storage option that this works with is their own.

Amazon sells music and other digital content which can be delivered to your amazon cloud storage.  Although you could store such content on a different cloud drive, the experience is not as smooth and requires a certain degree of technical know-how.  Microsoft's OneDrive storage is used to seamlesly sync profile data on Windows 8 computers.  Again, one could do this without OneDrive, but it would require considerably more effort.
Todder
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Todder,
User Rank: Moderator
5/21/2014 | 6:03:40 PM
Going the way of wireless in Canada
I imagine we're seeing the same synergy in cloud pricing as what the wireless phone industry in Canada is experiencing. The rooted players with multi-product lines discount to crush the competition. The small players will whither, consolidate, fail, or be bought out as market share gathers under the giants.

Cloud has been around forever. You won't see any gov't intervention as we've witnessed in the US for the telcos to divest in hopes of increasing the competitive landscape. What goes around comes around.
LaurieH036
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LaurieH036,
User Rank: Apprentice
5/22/2014 | 2:36:30 PM
Re: Cloud buyers beware
Indeed.  Price isn't everything.  And, with commodity hosters like AWS, you don't know where your data is.  If you ask, they won't be able to tell you exactly where it is.  If you are in a highly regulated industry (like health care), you would be smarter to go with a secure cloud provider and a private cloud or dedicated private cloud at that.  Not only will you know exactly where your data is, but you will likely also be getting better service when you need help.  - Laurie Head, AIS Network
dfowlerinu
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dfowlerinu,
User Rank: Strategist
5/22/2014 | 2:52:27 PM
Re: Cloud buyers beware
Agree.   All clouds are not created equal and like most industries there are the low cost raw technology providers and then the providers who add value that allow the technology to be more useful for solving business problems.  

The latter group...Managed Clouds and Managed Service Providers for example...are not just offering hosting but services on top such as capacity planning, security, compliance and 7/24 real person support.   The interesting point is that in many cases these companies have built business models that can offer the added service with their hosting at the same price or slightly more than the reduced pricesfrom Amazon and Google.
Google in the Enterprise Survey
Google in the Enterprise Survey
There's no doubt Google has made headway into businesses: Just 28 percent discourage or ban use of its productivity ­products, and 69 percent cite Google Apps' good or excellent ­mobility. But progress could still stall: 59 percent of nonusers ­distrust the security of Google's cloud. Its data privacy is an open question, and 37 percent worry about integration.
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