Is Cloud a race to the bottom, or to the top?
- 30 May, 2016 10:01
The Cloud services sector is a long way from being a commodity market with price barely impacting market share as customers look for value-added services.
In short, the latest Cloud Price Index (CPI) report from 451 Research suggests that price doesn’t matter.
Consequently, the CPI research demonstrates that Cloud providers’ so-called “race to the bottom” in Cloud pricing is a red herring. Instead, it is a race to the top, with the supply of higher-value services that is key to long-term, sustainable and profitable growth.
451 Research finds that virtual machine pricing has dropped 12 per cent on average over the past 18 months, while the price of storage, NoSQL, load balancing, bandwidth and other Cloud services have remained stable and continue to provide margins.
“Despite all the noise about Cloud becoming a commodity, our research demonstrates a very limited relationship between price and market share,” 451 Research Director of Digital Economics, Dr. Owen Rogers, said.
“Certainly, being cheap doesn’t guarantee more revenue, and being expensive doesn’t guarantee less.
"Cloud is a long way from being a commodity. In fact, the real drama is the race to the top rather than race to the bottom.”
On the whole, analysts believe that as the price for Cloud compute continues to fall toward zero, the hyper-scale vendors will add higher-value Cloud services as quickly as they can - aka ‘moving up the stack’ - recognising that the margins currently enjoyed on bulk sales of compute resources are not sustainable.
Data in the CPI report showed that the lowest-cost service providers have not won greater market share as a result of their pricing strategy. Instead, customers value additional services, local hosting and support and partnering with a familiar brand.
As outlined by Dr Rogers, the report examined how Cloud customers’ sensitivity to price varies by region, with the analyst firm correlating global pricing for the CPI small basket of goods against market share data from 451 Research’s Market Monitor & Forecast.
The resulting Cloud Commodity Score (CCS) measures this price sensitivity; the higher the CCS, the bigger the impact price has on market share.
With a CCS of just four percent, APAC Cloud price changes have minimal impact on market share, reflecting the finding that services in this fractured market cost about 19 per cent more than in the US.
“We believe APAC presents more opportunities for service providers than the US because the markets are fractured, with concerns about data protection across borders and a need for local services to meet local performance needs,” Dr Rogers added.
Going forward, Dr Rogers said most Cloud providers are pursuing two avenues to survive: expanding services and expanding to less mature markets.