Google Drops Cloud Pricing

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Taking aim at Amazon Web Services, Google on Tuesday slashed the pricing of its Cloud Platform services and introduced new offerings to tempt developers to deploy their applications in the company's datacenters.

At an industry event in San Francisco, Urs Hölzle, senior VP of technical infrastructure at Google, said that over the past eight years, a gap has emerged between the cost of cloud computing services and the hardware used to deliver these services. Cloud service costs have declined only 6% to 8% per year on average during this period while hardware costs have fallen 20% to 30% per year, he explained.

"We don't think this gap should really exist," Hölzle said. "We believe the price of virtualized hardware should follow the same price as real hardware."

To bring cloud computing costs closer to where they should be in light of hardware cost declines, Google has reduced Compute Engine prices by 32% across all sizes, regions, and classes; dropped prices for Cloud Storage by 2.6 cents per GB (a savings of about 68%); and cut BigQuery on-demand prices by 85%.

Google also simplified App Engine pricing, with reduced costs for database operations and front-end compute instances. And it introduced Sustain-Use Discounts that kick in when a customer uses a virtual machine (VM) for more than a quarter of a month. This discount can add an additional 30% savings to the new on-demand prices for customers who use a VM for a whole month.

Hölzle invoked Moore's Law to suggest that cloud prices haven't fallen at the same rate as hardware. But among event attendees, there was skepticism that Moore's Law alone could explain Google's price cutting, because the cost of running a VM extends beyond semiconductors to include things that aren't governed by Moore's Law, like utilities, real estate, and labor. 

Both Amazon and Microsoft are expected to respond with price reductions for their cloud computing offerings, Amazon Web Services and Microsoft Azure. But Amazon may have limited latitude to do so. The company generated $74.45 billion in revenue last year but only collected $274 million in income. It maintains low profit margins to grow, as if it were a tech startup, but it does need to make money to please shareholders. It recently took flak from customers for raising the price of its Prime subscription to $99 per year.

John Rymer, an analyst with Forrester Research, argues otherwise, noting that AWS is separate from Amazon's other operations. "Pricing is a fleeting advantage," he said in a phone interview. "Both Amazon and Microsoft have found that. You move, the competitor makes a countermove. Amazon has always been really aggressive on pricing."

Rymer sees Google's price reduction as the first of a series of steps the company needs to take in 2014 to court developers, and Hölzle more or less committed to that prescription when he told event attendees to expect additional announcements later in the year.

"The reality is AWS has begun to pull away and [Google] really needs to raise its game," said Rymer, pointing to AWS's larger menu of cloud services. "Google needs to rethink its approach to developer services."

Google appears to be doing just that. It's added new diagnostic tools to its Cloud Developer Console to reduce troubleshooting time, and it introduced Managed VMs, a way to combine the manageability of App Engine with the flexibility of Compute Engine. To please enterprise customers, it added support for Windows Server 2008 R2 and made Red Hat Enterprise Linux and SUSE Linux Enterprise Server available to everyone. And Google launched BigQuery Streaming, to allow near real-time analysis of massive data streams.

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