It was about a year ago that start-up cloud provider Profitbricks raised their profile by offering an exclusively Infiniband connected cloud at half the price of Amazon Web Services, banking that price performance was the key. Since that time new cloud providers have appeared, well-known vendors have ramped up their cloud offerings and lowered prices, and the industry had focused on reliability as they attempted to make IaaS a regular piece of the potential customer’s thought process.
As Larry Dignan reported earlier this week, the cloud price wars have been an ongoing battle, with the major providers involved in an ongoing price war for most of 2013. But this week’s events clearly signaled the start of a major engagement in the ongoing war.
Let’s start with Cisco’s announcement. Always a player in providing the equipment for cloud providers everywhere, Cisco plans to go straight up against these customers with the announcement of plans to start their own cloud service provider business, with an initial pledge of $1 billion to get the service up and running. Now normally the repercussions from such an announcement would start shaking things up, but it’s clear that Cisco didn’t expect to immediately find itself behind the curve.
No sooner had this announcement had time to sink in before Google announced that it was making major price cuts in the cost of their services after announcing that cloud prices weren’t dropping fast enough, pointing out that the 6 to 8 percent annual reduction in service costs were lagging behind the 30 percent annual drop in hardware costs. And to back up this claim they announced that they would be cutting prices for their cloud services by as much as 85 percent in some instances.
So while the industry was digesting this announcement came the immediate response from leading provider Amazon; they are cutting all prices by an average of 51 percent, giving additional impetuous to a cloud market where the cost of the services is rapidly approaching the basic cost of running the operation.
Given Microsoft’s previous response to price cuts it is a reasonable presumption that they too will soon be matching these reductions, while other Tier 1 cloud providers will be forced to follow suit, despite their lack of the deep pockets that Amazon, Google, and Microsoft possess. IBM, who has been ramping up their Softlayer cloud business, has been quiet on the issue, so far, but certain features of their offerings, such as bare-metal cloud capabilities, aren’t available from the other big-name players.
Regardless of how low the prices get, the big draw for cloud services for major companies will be based on reliability, availability, and security. All areas in which cloud providers have been struggling to prove themselves.
While picking a winner from the pack would be premature, I'm willing to go out on a short branch and point out a few likely losers. Pricing is going to make it very difficult for smaller providers to compete, as well as new start-ups looking to get into this business. Even Cisco will have to be very careful as it rolls out services, playing to their strengths and finding ways to differentiate what they offer from everyone else, despite their big budget.
But the one big name that may take the biggest hit from all this is Oracle. Despite CEO Larry Ellison already acknowledging that the cloud is a commodity product and that it has been eating away at their revenues, they plan to offer services competitive with Amazon come this summer. And with declining revenues in a cutthroat market, the Oracle Cloud is teetering on the edge of failure. And this might just be the push it dreads.