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?

David Fowler, VP Marketing, INetU

May 15, 2014

4 Min Read

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.

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About the Author(s)

David Fowler

VP Marketing, INetU

Karen Tegan Padir is the CTO and a Senior VP at Progress, a global software company that simplifies the development, deployment, and management of business applications on-premises or in the cloud, on any platform or device, to any data source. A 20-year software industry veteran, she is responsible for defining and delivering the company's technology strategy, innovation, and vision. 

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