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Cloud Storage's Race To Zero

The race to provide free unlimited cloud storage can't end well, not for the vendors -- or the customers who believe they have finally found a free lunch.

Cloud storage might look like a cheap and easy way to store your files, but don't be fooled.

In late October, Microsoft began rolling out unlimited storage on OneDrive for its Office 365 customers. It's a move designed to make Microsoft more competitive against Google Apps for Work, which threatens Microsoft's Office business.

All-you-can-use storage seems like the ultimate bargain. The customer gains ever-increasing cloud capacity at a decreasing cost. The media lauded the decision, calling it a competitive move for Microsoft in what looks like the cloud's "race to zero" -- seemingly unlimited storage for non-paying customers. But, upon closer inspection, it's not as cut-and-dried as you might think. The indirect, unseen costs of the cloud make it far more expensive than companies admit, and that should be a cause for concern.

Managing checks and balances
The cloud cannot be truly "free" because it costs so much for the vendors to offer this service. While consumers see a vast landscape of endless cloud storage, the physical manifestation of the cloud is expensive. Amazon, Dropbox, and others are pouring big money into back-end infrastructure; they're constructing data centers around the world to sustain their cloud services.

[Is Amazon kidding itself? Read Amazon Says Expansion Worth Price.]

Costs are up and subscription prices are down, so where does Microsoft make up the revenue? Although Microsoft's OneDrive ploy seems pretty explicit in piggybacking on the paid subscriptions for Microsoft Office 365, other companies are establishing revenue through more indirect channels such as advertising, or placing a bet that aggregate customer usage is eventually profitable.

When cloud companies bleed cash just to accommodate the demand for their services, those price reductions (and lack of compensation in other revenue areas) start to look pretty scary. Razor-thin revenue margins don't enhance long-term viability. And you want your data to be viable long-term.

Take a look at Amazon Web Services, which announced its 45th price reduction in six years in August. The company doesn't separate AWS's revenue, conveniently hiding it in its "Other" revenue report (which includes co-branded credit cards and advertising), but it still isn't very reassuring. According to VentureBeat, the growth in Amazon's Other revenue category has significantly slowed, with it growing 39.58% in the third quarter based on $1.34 billion in revenue -- a stark contrast to the 80% rate it saw in 2011.

That's the state of the biggest cloud company in business right now. Others are still jockeying to keep up with Amazon's sheer size and ability to cut costs.

Sustainability in jeopardy
To make a long story short, the cloud storage market is volatile. Cloud companies are sacrificing their revenue to keep up with the cloud affordability arms race, and the collateral damage could be your data. Companies could get acquired or simply fade into the ether, leaving loyal customers short-changed or empty-handed.

For example, look what happened to Bitcasa. Back in 2011, Bitcasa was launched on its reputation of providing unlimited access to the cloud. You could store whatever you want, pay a criminally low flat rate of $10 a month, and take advantage of throwing whatever you wanted into the cloud. Many users loved it.

Then, last year, the gravy train stopped flowing as the company decided to increase the rate of its services ten-fold: New users now pay $1,000 for the privilege of unlimited online storage. Although the company reassured existing users (2% of which store more than 5 terabytes of data in the cloud) that they would be grandfathered into the revised plan without the cost increase, its extreme price increase shows just how difficult it can be for small companies to manage costs in the cloud.

Let's say that at some point a cloud company's pricing model becomes unstable enough to require acquisition or closure. Imagine having to pull down terabytes of data from the cloud under a time limit, or risk losing it all, while other customers are doing the same.

There are valuable cloud solutions that affect our lives daily, but don't be fooled into thinking that free is free. Everything comes at a cost, so choose your price wisely.

Our latest survey shows growing demand, fixed budgets, and good reason why resellers and vendors must fight to remain relevant. One thing's for sure: The data center is poised for a wild ride, and no one wants to be left behind. Get the Research: 2014 State Of The Data Center report today. (Free registration required.)