If you've been watching the news in the cloud industry lately, you'll know prices for the major public cloud offerings toppled like dominoes a few weeks back.
We're not talking token discounts either — reductions have shaved anything from 30-60 percent off services from Amazon, Google, and Microsoft Azure.
While it seems cloud computing users can only benefit, what will a price war do to the mid-tier providers who can't possibly afford similar reductions? Some cloud consumers are even asking why they were paying so much more before, if the new prices reflect true cloud costs.
ZDNet spoke to all three providers, and the refrain from each was similar — Moore's Law and increased efficiency are ongoing, and they'll pass savings along to customers any time they can.
"We believe cloud computing should be less expensive and more simple," is how Greg Demichillie, director of product management, cloud platform, Google, puts it. "This means a more streamlined cost model with no upfront payments, no locking customers in, and predictability so you can stay on budget.
"This is the 42nd time we've reduced our prices over the last eight years," says Simon Elisha, an Amazon principal architect. "If we can improve efficiency we can pass on cost savings to our customers."
Take a cynical view if you like — especially about the timing of the announcements — but Elisha explains that we're talking about buying power and deployment technology on an epic scale, where small changes can cause butterfly effect-style savings.
"We do a lot of tuning in our supply chain. It's around the way we design and deploy services," he says, pointing to an example where the company was able to drop prices up to 75 percent.
Staking claims in the clouds
When it comes to major pencil-sharpening of cloud service provider (CSP) prices so close together, experts think the choruses of 'price war' you've heard are right. Of the analysts and industry players we spoke to, many also used the term 'land grab'.
According to Ross Mason, founder of cloud integration provider MuleSoft, "The price reduction is just the race to grab as many workloads as possible. This 'IaaS phase' will just be the customer acquisition cost. The real value will be extracted later as they own your data center and lock you into value add services."
Steve Hodgkinson, IT research director at industry analysis firm Ovum Asia/Pacific, also thinks the big CSP moves might be efforts to 'usher in' cloud services as a whole. "Amazon and Google are competing to win market share and change the mindset of buyers - away from buying, owning, and operating technology towards buying and managing services," he says.
It's an outlook Google itself seems to agree with. As Greg Demichillie says, "We think cloud's just at the beginning of its journey and we're very excited about it."
To communications and data services executive Michael Bremmer, it's all about marketing. "General Motors sold a ton of cars with zero percent financing after 9/11," he says. "Also cloud adoption isn't growing as quickly as the tech giants want you to believe and there's a glut of capacity, so prices drop."
We might indeed be seeing the loss leader sales principle in action, where flashy, big-ticket items at the front of the store are priced so attractively (even at a loss) they get customers in the door who might then be swayed by higher margin add-ons.
General Manager of cloud computing for BMC, Chris Keene, certainly thinks that's the current strategy. He says providers are willing to make bare bones services low cost because of the opportunity to capture more value with other services. "Just look at the huge portfolio [Amazon] is assembling around areas such as platform as a service," he says. "They're bound to be stickier."
Predictably, asking the big CSP players about a price war results in a round of assurances it's all 'coincidence' and 'purely circumstance'.
Microsoft was the only one to even acknowledge the competition — in a March 31 blog post, the company wrote "Consistent with our previously announced commitment to match Amazon on prices for commodity services, we are cutting prices on compute by up to 35% and storage by up to 65%".
Of course, the only thing the rest of the industry can talk about is the follow-the-leader nature of the reductions.
"In this business, you're cheaper for about 24 hours," said a Forrester analyst in a Wired story regarding Google's price drop. It was followed by Amazon's announcement — 24 hours later.
Greg Arnette, CTO of Sonian, thinks Google is playing catch-up. "Entering the public cloud arena many years after Amazon, Google needs to be provocative with features and price to attract the next batch of startups that would [otherwise] go to Amazon Web Services by default," he says.
When all's said and done, precipitous price drops might be little more than a great marketing strategy. If a recent survey is right, the major providers know price isn't always a high criterion for enterprise users. In US-based data and cloud consultant 2ndWatch's survey of 100 IT directors, 62 percent said features and performance were more important than price.
Finding true worth
Cloud pricing is following a similar path as domain names in the late 90s. Where one or two providers used to charge upwards of $100, today any ISP does the same thing for ten.
The cloud isn't exactly the same, someone still has to build and maintain data centres, but even taking the service layer of software and management into account, many are asking exactly what they paid for previously if providers can cut prices by two thirds overnight.
Of course, the cloud comprises more than just racks of computers. Even architectural design, networking and storage technologies are only part of the overall product.
"Early last year we charged less for internet traffic going into AWS because we were able to negotiate better deals with providers in certain regions as our volume had increased," says Amazon's Elisha.
But to Gartner research director Michael Warrilow, assurances about efficiency or buying power amount to little in such an opaque process.
"There's such a lack of transparency on the costs borne by the major public cloud providers right now, there's no way to be certain they're even making a profit," he says.
Amazon's Elisha says few customers are asking about previous costs being artificially high.
"We don't get that feedback," he says. "For most it's the joy of getting this reduction without having to renegotiate."
Even so, some observers think we should look much deeper than eye-catching price reductions.
"Services are often fronted by a systems integrator or consulting firm," says Ovum's Hodgkinson. "They may or may not pass on the price reductions depending on how their contracts and services operate."
Even more troubling are the enterprise customers finding they have little choice but to follow where the big three take them.
"With the exception of a few like Facebook, most enterprises don't have the ability to scale their own private clouds and stay price competitive with the major providers," says Chris Haroun, a Silicon Valley technology venture capitalist.
Smaller cloud operators who can't capitalise on the same scale as the big providers face a similarly bleak future.
"This is a major threat to smaller local providers," says Ovum's Hodgkinson, who says survival means finding a niche like a vertical specialisation.
"Most providers will need to get big, partner with someone who's already big, or get out."
Of course, smaller CSPs are forced to construct a service and a value proposition that's not price-focused to win customers – they need specialisation that big providers can't match. That has an upside — it will generate innovation across the board and weed out competitors who have nothing compelling to offer.
"There are of course several reasons why local might suit," says Gartner's Warrilow of just one factor that might count against the big guys. "Data residency is one of them and, right now, Edward Snowden would appear to be their best friend."
Managed backup, disaster recovery and archive services in the cloud are other good examples of specialisations, and Brent Bensten, CTO of cloud services provider Carpathia says escalating price wars will make the advantages of customised offerings even more apparent.
"You often get what you pay for in terms of security and compliance in a public cloud," Bensten says.