Price war, what price war? Why Cloud has “no bottom price”

Price war, what price war? Why Cloud has “no bottom price”

“If you believe the hype, public Cloud providers are in a cutthroat price war where margins are being slashed, and profitability is at risk.”

Cloud costs are falling slowly across the industry, with recent research unearthing big savings for enterprises willing to commit.

Market research findings from 451 Research claims that while on-demand pricing has fallen only slightly at 2.25 per cent since October 2014, it is nowhere near matching the 12 per cent reduction achieved by those enterprises that negotiate and commit.

Using 451 Research’s cloud pricing model, representing a typical multi-service on-demand application, the cost is now $US1.68 per hour; in October 2014, the cost for the equivalent basket of Cloud services was $US1.72.

“If you believe the hype, public cloud providers are in a cutthroat price war and ‘race to the bottom,’ where margins are being slashed, and profitability is at risk,” says Dr Owen Rogers, senior analyst, 451 Research's Digital Economics unit.

“The reality is there is no cloud price war. There are battles being fought over certain cloud services, particularly compute, where providers are seeking publicity and market share in return for price cuts.

“But Cloud providers are more than just compute - considering 50 per cent of our typical Web application’s costs relate to cloud databases, it’s easy to see how sales of more value-adding services can offset declining margins on basic services.

“Cloud has no bottom price. Even if infrastructure is eventually given away for free, as long as the provider sells other services, which offset this loss, then it can still be a profitable business.”

Revealing the extent to which service providers encourage commitment to help them plan capacity and ensure capital for infrastructure investment, 451 Research’s best-case price indicator is only $US0.95 - which shows 44 per cent savings compared to on-demand.

The best-case price measures the same application used the same way as on-demand pricing, but takes into consideration negotiation, subscriptions, reserved instances, term commitments, and sustained-use discounts.

Although the Cloud Price Index shows compute pricing has fallen by 4 per cent and bandwidth has come down 3 per cent, service providers are enjoying increased revenue and profits from other services such as management, PaaS, data and storage pricing, which have remained static over the same period.

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