Cloud's Commodity Pricing Squeezes Service Providers, Creates Opportunities

Cloud service providers are already starting to feel downward price pressures as basic capacity and services are quickly becoming commodities. A price wars heat up, the excess capacity that providers need for peak traffic can become a drag on profits, but it also represents new opportunities.

By Jeff Vance
Mon, August 27, 2012

CIO — Cloud computing is slowly becoming a mainstream technology. However, even before the hype cycle has died down, cloud providers are already starting to see downward price pressures. Every hosting provider under the sun is now repackaging itself as a cloud provider, and basic capacity and services are quickly becoming commodities.

With downward price pressures, the excess capacity that providers must have on hand for peak traffic becomes a drag on profits. After the cloud gold-rush era is over, providers will need to find ways to turn that cost center into a profit center. Otherwise, they'll lose out to competitors.

[Analysis: Amazon Faces Commodity Cloud Competition]

"Cloud providers have had a tough time figuring out their capacity projections," says Antonio Piraino, CTO of ScienceLogic, a provider of cloud management tools. "These days service providers are judged by their margins. Many have impressive gross margins, but for almost all of them, their net margins are in single digits. Once you account for power, software licensing, real estate and so many other costs, your profits evaporate."

Piriano argues that this puts smaller cloud providers at a disadvantage. A behemoth like Amazon can afford to have excess capacity on hand, while for smaller providers, it's a challenge that must be solved in order to compete and survive.

Larger cloud providers have already started to differentiate themselves through services. That's how they compete with Amazon, but it's also how they entice large enterprises to get off the sidelines and participate in the cloud revolution.

"Larger enterprises look for holistic services. They seek out more robust solutions, with more services layered on top," says Ellen Rubin, vice president of cloud services for Terremark/Verizon. As larger enterprises sign up for cloud services, they expect detailed SLAs, security, disaster recovery capabilities and management tools.

The focus on services beyond basic capacity is starting to trickle down market, as well, and this challenge could end up being a huge opportunity for service providers.

Why Excess Capacity Is an Opportunity

Excess capacity, after all, needn't be idle capacity. If non-time sensitive services can use the capacity, then something that previously dragged down profit margins now becomes a revenue driver. With businesses already demanding services like security, disaster recovery and management, cloud providers conveniently have a service roadmap laid out ahead of them.

Of course, if cloud providers are slow to act, startups will rush in to seize this opportunity. Startup OnApp was founded to help providers roll out new services. In 2010, as providers rushed to get into the cloud game, OnApp rolled out a cloud deployment and management platform that helped simplify the cloud roll-out process.

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