In the sprawling cloud landscape, price cuts had been mostly confined to virtual machines. This allowed service providers to capitalize on steadily growing margins for the remainder of their product portfolio. Until now.
What we are witnessing is a shift that is about to expand beyond compute and bleed into the wider domain of storage, including databases.
Storage, the new battlefield
In order to gain rather than lose market share, as competitiveness increased with new players entering the field, some made the move to lower their prices on virtual machines. According to 451 Research: Cloud Price Index, the rivalry spared services that extended beyond compute, keeping those prices steady. However, the pricing avalanche seems to be spreading.
Over the last 12 months, object storage prices have dropped in every region, in some cases by as much as 14 percent. Meanwhile, the core of cloud computing infrastructure that seeks to extend the cloud’s reach across mobile and social platforms has dropped by 5% during the same time span. We seem to be entering a new era of demand and valuation duress that may affect a larger scope of cloud economics in the coming months.
When did the cloud storage war start?
IBM takes the prize as the quiet initiator of the new wave of pricing war. It began in the third quarter of last year with the company’s gambit to drop its storage prices. Soon, Amazon Web Services, Microsoft and Google trod on its heels with similar markdowns.
“The big cloud providers appear to be playing an aggressive game of tit for tat, cutting object storage prices to avoid standing out as expensive,” said Jean Atelsek, analyst, Digital Economics Unit at 451 Research. He added, “This is the first time there has been a big price war outside compute, and it reflects object storage’s move into the mainstream.”
As more enterprises move more data into the cloud, it will flood the space preparing it for the next big shift. Through this, storage is likely to remain a center focus, as providers prepare to capture new customers entering the market.
Price cuts moving beyond compute could be the result of market reaching maturity. Analysts believe that what is responsible for driving down demand is cloud storage having permeated the farthest corners of web and enterprise. In fact, Cloud Computing consultant, Judith Hurwitz, went as far as to say that cloud computing has gotten so pervasive in the way we operate, it may soon vanish from the IT vocabulary.
An additional factor contributing to the pricing war may spring from the growth of cloud-native development of apps. Composed of interconnected cloud services, Native Cloud Applications (‘NCA’) connect services run on distinct servers in one platform. This allows developers to break down their app into features that they can outsource to various locations. Due to its horizontal spread, this scalable approach aids in load balancing. It is also cost-effective because it eliminates the need to overprovision in-house hardware. This setup, at least in theory, allows an NCA to be shipped the same day it was completed, making it very attractive to developers.
Adding to the vision of the cloud having thoroughly permeated our work environment is the rise of enterprises looking to outsource their scrum systems and data management to expert storage vendors, rather than hosting them in-house. This adds to the bulk of big data migrating out of on-site infrastructure, fueling the pricing war.
The final, more ethereal driver behind the price cut timing could stem from our faith in the ubiquitousness of this model. It’s a form of paradigm that bets on the cloud’s long-term effectiveness, and thus must accept the oscillations along the way.
Margins are still high in the cloud world
Regardless of the market’s shakedown due to the cuts, cloud computing companies are still reporting healthy margins. Amazon’s quarterly AWS revenue of $3.7 billion topped forecasts with a 42.6 percent growth, and an operating income of $890 million. Quelling shareholder’s anxiety was a net profit margin of more than 24 percent, even higher than in the same quarter a year earlier.
Microsoft’s Azure, Intelligent Cloud reported the biggest revenue growth in the third quarter, reaching $6.7 billion, and growing by 93%.
Alphabet Inc.’s share of non-advertising business, which houses its cloud unit Pixel, smartphones, and the Google Play store, posted a 49.4% jump in revenue to $3.1 billion at the end of the year’s first quarter. While Alphabet did not disclose the details behind the revenue spread, analysts have stated that majority of it came from the cloud.
A look from above
Despite the downward trends incited by the price wars, cloud services as a whole are not necessarily getting cheaper. A plethora of hidden costs keeps the margins blooming. Its substantial source? Data movement. Along with architecture and data processing, it’s been responsible for drawing the biggest slice of profits. Shuffling data from place to place is common practice and it is not free. And since once in the cloud it is an uncommon practice to withdraw, enterprises will keep paying the price.
What’s next in the cloud war?
As the market wheels keep on turning, there is no stopping the pricing trends that are already in the works. Prices for virtual machines and object storage will continue to fall. According to the 451 Research Digital Economics Unit, what we may soon get to witness are relational databases entering the competitive ring of fire. At the same time, expect to see new services such as Amazon’s Lambda, which is priced in time to execute commands versus pricing per virtual machine model.
Also of note, the complexity of hosting applications is getting more and more onerous – Distributed Denial of Service Attacks (DDoS), Ransomware, and generally increased abuse of devices connected to the Internet – specifically the Internet of things (IoT) devices. With that comes an opportunity for cloud providers to help continue customers solve not only today’s
With that comes an opportunity for cloud providers to help continue customers solve not only today’s challenges, but the challenges that are faced tomorrow. With the opportunities ahead, the cloud landscape looks bright for hosting providers that can help customers succeed in a more connected, volatile hosting environment.
The author is the founder and CEO of Atlantic.Net, a Managed Cloud Hosting company focused on providing valuable hosting solutions for businesses and healthcare providers, backed by world-class support.