Who wins the cloud price wars?

Who wins the cloud price wars?

Summary: It seems to be a good time to be buying cloud services, but what does the future hold? And is this the death knell for the Oracle cloud?

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TOPICS: Cloud
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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.

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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.

Topic: Cloud

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12 comments
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  • Cost cutting can only lead to a monoply

    The cost war between AWS and Google, and possible Microsoft/IBM will eventually leave users have to choose between a monopoly of AWS and Google (Microsoft and IBM might survive in this market) as it will kill off the smaller vendors such as Rackspace, Joyent, Linode and DigitalOcean etc.

    This is bad news for users for once the dust has settled AWS and Google will raise their prices and they will have no choice but to accept the prices as there will be no competition.
    pjc158
    • How about they will all be losers?

      The one winning the war will be he who cuts the price (and therefore his profit margin) to the lowest. How can you make any money running business like that? This is PC OEM pricing war all over again. I say none of these public cloud companies will make much money just like what HP, ACER and so on have found out in nowadays PC market.
      LBiege
      • Switching from HP or ACER was easy not so with these

        Switching from HP or ACER was easy not so with these, they add more and different service and charge you in future.
        Mac_Win
    • MONOpoly means ONE

      NT
      Economister
    • Not necessarily. Cloud storage is quickly ...

      ... becoming a commodity service. An individual can buy an HDD for less than 10 cents per GB. An enterprise can do so for far less than that. It is hard to build a monopoly on a commodity service so more companies will "throw-in" more and more "free storage" in order to get customers to subscribe to their revenue-generating services (e.g. iTunes, Amazon - music/video streaming, MS Office, GoogleDocs - personal productivity, Kindle, Nook - e-booksellers, and enterprise storage (IBM).
      M Wagner
  • I see the biggest loser being Amazon,

    since they are not really a profitable company.

    Their "earnings" reports have been the kind that would send a company into insolvency, but, the thing keeping them going is "other people's money", in the form of stockholders.

    Amazon cannot afford to compete in the low-price wars for too long, especially against deep-pockets competitors like Microsoft and Google and IBM.

    Being big is not the same as being competitive.
    adornoe
    • Not profitable? Let's see, Prime subscriptions support ...

      ... the entire Kindle line-up while providing audio/video streaming, cloud storage, and free shipping to millions. The e-book business exceeds hardbound and paperback sales and cost them Amazon little except for the per-customer costs of maintaining the network.
      M Wagner
      • It doesn't matter how big any division, or the entire company is, and it

        doesn't matter how "big" their sales are overall. They still are not a profitable company, other than the measly "profits" they've shown in the last couple of quarters. For a company as big as Amazon is, they should be producing profits in the multi-billions of dollars by now.
        adornoe
        • Big company means smaller margins!

          With an exception to ios products for Apple generally speaking big companies would have many revenue generating legs with medium to low margins. I think having 10-18% margin is great for companies such as Microsoft, Amazon, IBM, Google. I think eventually pure IaaS provider would have to perish as its more expensive in both short and long run. so on that ground Amazon will loose its market share if it does not have SaaS solutions
          ptpavankumar
    • Haven't they always been that way?

      Amazon is one of the most unusual companies in that everyone wants to own their stock, but they do not actually make money. The last several years it has been their "Non-Operating" expenses that have been killing them though(http://www.marketwatch.com/investing/stock/amzn/financials). I wonder if the web services division isn't thrown into this area.

      I don't think this will actually be an issue for them though, as this is SOP for Amazon and compared to the other vendors AWS is a great product. Amazon is skilled at driving public perception in the direction that they are a profitable company, which keeps their stock price going up. While this would have never worked in a world of professional investors, it works well in the world where every one and their uncle seems to have an eTrade/Ameritrade account.
      jebailey1120
      • It should NEVER be SOP for any company, no matter the size, to be showing

        such poor results.

        Amazon has been around for quite a while, and they shouldn't be concerned with just growth, at the expense of revenue and profits.

        The only growth that shareholders can expect, is in the stock price, but again, a stock price should be dependent on revenue and profits. Amazon is an utter failure in revenue and profits.
        adornoe
  • Oracle missing out on the cloud boat

    Oracle made two strategic mistakes: (1) starting developing Fusion as an on-premise product (to replace the plethora of on-premise products it bought such as PeopleSoft, Siebel, Hyperion etc.) before trying to adapt it to the cloud - all the successful cloud vendors are native cloud see Workday or Salesforce; (2) buying Sun. Why would a company now pay for a server, database license and a half-baked hosted system when it can save on all three by going with one of the cloud natives?

    To understand why Oracle has painted itself in a corner and, as David says, will inevitably fail in the cloud, I cannot recommend enough an excellent book, "High-tech planet" written by a former Oracle sales executive. It is a funny, terrific and insightful account of what hides behind headlines-grabbing news and figures. It describes in detail the business atmosphere at Oracle, its sales culture plus a host of shenanigans (financial, mediocre management, yes-men culture ) that go a long way in explaining what is wrong about Oracle.

    The first few chapters can be sampled for free on Amazon: http://amzn.to/czf0qw
    antoinehepburn