Who Will Win The Google-Amazon-Microsoft Cloud Computing Price War?

It's a great time to jump into cloud computing. If your business runs on the Web, you can reap the benefits of a good old fashioned price war among Google, Microsoft and Amazon. The trio is lowering prices for their Infrastructure-as-a-Service (IaaS) cloud-computing platforms in order to attract developers. For startups and other companies not tied to legacy platforms, that means the time is right to get a good deal on building and running websites and client-side applications on any one of three state-of-the-art data centers.

A New Round Of Price Cuts

Less than six months after launching Compute Engine, Google dropped prices this week by about 5% for its baseline services, even though the cloud service is still in preview mode and available only to select customers. Amazon and Microsoft are expected to bring their prices in line with Google's for their Elastic Compute Cloud (EC2) and Azure services, respectively.

That's because the rivals have cut prices in unison before. In March, Amazon lowered pricing first, and Microsoft and Google followed suit within days. Google had Cloud Storage at the time and unveiled Compute Engine in June at its Google I/O developer conference.

"All other factors equal, price isn't going to get you to success," warned Melanie Posey, analyst for IDC. "But having pricing out of line with competitors is certainly going to set you back in the market."

Is Anyone Making Money?

No one on the outside knows whether Microsoft, Google or Amazon is making money on their increasingly important side businesses of renting computing power via the cloud. None release the financial details needed to determine whether their cloud platforms are profitable.

Because these are not any of the companies' core businesses, there's little pressure to make money right away on cloud services. "It may very well be the case that these cloud platform divisions don’t have any set mandate to make a profit," Posey said. Therefore, pricing could go down much lower, if the companies need to prime the customer pump even further.

Amazon has the first-mover advantage. The online retailer opened its data center to developers in 2002, making Microsoft and Google the challengers. Amazon has done well in building a customer base of startups and established businesses. Among the biggest cloud-based sites it supports is Tumblr.

But the Infrastructure-as-a-Service market remains young, and Google and Microsoft have plenty of cash to throw at their fledgling platforms. Also, because the goal isn't yet about stealing Amazon customers, but more about attracting the growing number of companies building Software-as-a-Service (SaaS) businesses in the cloud.

In a recent survey of 556 organizations across 10 countries in North and South America, Europe and Asia/Pacific, Gartner found 71% have been using SaaS for less than three years and 77% are expecting to increase spending on the application-delivery model.

Cost Is Only One Factor

While low prices certainly help get potential customers' attention, it's not enough to seal the deal.

"I would say that everyone continues to have room to cut prices," said Gartner analyst Lydia Leong. "However, customers generally say that agility, not cost, is their primary driver. There are use cases where the cheapest possible compute is valuable, but we generally see customers buying based on capabilities, not price."

That's true even for cash-strapped startups. "Startups are far more interested in time to market and capabilities than cost, since the former two things translate to competitive advantage," Leong said.

So with every round of price cuts, the vendors will also be adjusting the amount of system memory, processing power and other features they offer, depending on market demand.

No matter which company edges ahead in features, any advantage will likely be short lived. Amazon, Google and Microsoft are all fierce competitors and they are unlikely to let a rival enjoy an advantage for very long. That mean that the real winners of the cloud computing price war will be startups and other potential cloud customers.

 

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