In Public Cloud Computing Fight, the Gloves Come Off

The past two weeks brought big news in the public cloud computing market. In the course of four days, three technology giants made bold statements about their intent to be one of the most important public cloud providers — and, indeed, position themselves to be the No. 1 cloud company on the planet.

For anyone using cloud computing, what happened last week indicates how critical the biggest companies in technology view it and how cloud adopters need to evaluate their strategy in light of the ongoing price competition upon which the leaders have embarked.

Here’s the high-level overview of what was announced:

• On Tuesday, March 25, Google announced it was cutting on-demand virtual machine prices by 32 percent. Moreover, it announced what it called sustained-use discounts, in which the on-demand price is progressively lowered once a virtual machine is used for 25 percent of a given month. At full-month use, this discount reduces the cost for a virtual machine a further 30 percent. In addition, Google dropped the price for storage to 2.6 cents per GB per month. Finally, it indicated this was just the first of a series when it stated that its future prices would continue to drop in response to lower costs based on Moore’s Law.
• A day later, Amazon Web Services announced a set of price reductions to EC2 and S3, along with cuts in other service prices. EC2 on-demand costs will go down around 35 percent, with reserved instance prices cut a further 30 percent or so. S3 prices were cut about in half, down to around 2.75 cents per GB/month.
• Not to be left out, Microsoft announced price cuts intended to match AWS prices. Azure virtual machine prices are down around 35 percent, and blob storage (e.g., S3-like storage) has been reduced 65 percent to around 2.75 cents per GB/month.

Cloud Providers Determined to Demonstrate Their Relevance

As I noted in my last post discussing IDC’s 2014 cloud computing predictions, these cuts aligns with IDC’s prediction that we can expect ongoing competition among these vendors to ensure they remain one of only several public cloud providers that IDC forecasts will dominate the future public market.

Even more directly, these price cuts align with the last of my 2014 cloud computing predictions: This year would bring a bloodbath of price cuts among the biggest cloud provides as they fight for user adoption.

Simply put, these cuts show just how seriously these three companies view this market. By these actions, each has indicated its view that cloud computing is the next-generation technology platform — and its ambition to be a dominant player in the future of IT.

There’s another way of looking at it, of course: Each is terrified at being rendered irrelevant to the future of IT and is determined to do whatever it takes to stay at the table, even if it means carrying on a sustained price war.

[ Commentary: Amazon Web Services Competitors Get Bad News From Gartner ]

Google, AWS and Microsoft each have both strengths and vulnerabilities, making it difficult to directly compare them on dimensions other than cost. That said, users can expect low costs and ongoing price cuts as each of the three shows a willingness to reduce margins in search of market share.

Certainly, from a user perspective, the prospect of three giants constantly chopping prices in a fight to induce adoption is enticing. While users shouldn’t overlook other factors when deciding which provider to use; however, expectations of future cost reductions should be factored into selection decisions.

Given the reality of low and falling costs, what conclusions should we draw? Here are four thoughts pertaining to users and four that matter to cloud providers.

What Low Public Cloud Computing Costs Mean to Users

1. If you’ve been planning a private cloud based on an assessment (or belief) that you can operate at lower cost than available from public providers, you have to rethink your business case. How competitive can you be at today’s prices — and how well can you compete against future prices reductions likely to be on the order of 30 percent per annum?

2. It’s a buyer’s market, so don’t be afraid to bargain. Public cloud environments resemble all capital-intensive industries: Heavy investment requires high utilization to turn a profit which, in turn, dictates a willingness to trim prices in an effort to raise utilization.

[ Analysis: How Google is Reinventing Cloud Pricing ]

3. If you still maintain a desire to run your own cloud, even after these price cuts, recognize that the reasons to use it will rest on compliance and locality of data. Be ready to focus on these areas and bring real competence regarding them.

4. Understand why you’re adopting cloud computing: It reduces the friction involved in infrastructure provisioning and thereby enables agility and speed. This means that low prices aren’t enough. In addition, the provider’s service breadth and ecosystem richness are critical components necessary to accelerate your application lifecycle. Evaluate these factors in addition to costs in your selection decisions so that you gain the greatest benefit from using cloud computing.

What Low Costs Mean to Cloud Service Providers

1. Recognize that cost competition will be an ongoing presence in this market. Expect continuous price cuts to be part of your daily reality. Amazon’s stated market strategy is to seek large profit pools and figure out a way to drain them by offering low-cost offerings. The days of offering barely differentiated products and services carrying high margins are over. Figure out how to succeed with low profit margins.

2. If you hope to be one of IDC’s six to eight dominant providers, recognize that this is a scale and investment market. You’re need to be willing to invest billions to build out worldwide capability. Being a major player in this market isn’t for the faint-hearted or the shallow-pocketed. Three companies have announced their intention to compete, and it remains to be seen if other large technology providers have the appetite to stay in the game. In this regard, Cisco’s billion-dollar investment in creating its own public cloud offering should be seen as an ante up to enter that game, not the totality of investment required to win.

3.Understand that providing the full menu of services and ecosystem requires a real software expertise to develop services beyond basic Infrastructure as a Service and manage them at scale. There’s no way to drop a basic orchestration product into a data center and compete with the market leaders. Expect a mad dash by providers to develop or acquire enough expertise to build out the software infrastructure required to compete at this level.

[ IDC: Cloud Will Be $107B Industry By 2017 ]

4.If the prospect of a low-price cloud provider business is unappealing, recognize that you need to offer something differentiated and valuable in order to boost margins and profitability. It won’t be enough to assert, “We understand the enterprise.” It will require true domain expertise, such as understanding a given industry’s operations or compliance requirements, in order to offer customers value beyond that available from a low-cost provider. This approach is attractive, but it requires a strategic intent to acquire knowledge and talent focused on value-adding offerings. This won’t necessarily be cheap, but it will require far less investment than that needed to operate a globally-scaled offering.

As Cloud Service Providers Go to War, You Reap Benefits

The announcements of the past two weeks show just how serious Amazon, Google, and Microsoft are about cloud computing and how much they want to win. To my mind, they should be seen not as tit-for-tat one-upmanship but, instead, as the easily foreseen implication of a high-stakes, high-cost contest played out by three of the most competitive technology companies around.

If you’re a user, prepare to enjoy the fruits of this contest. If you’re an existing technology vendor or a postulant competitor to these three companies, evaluate your strategy, gird your loins and prepare for an all-out war that will dictate your future.

Bernard Golden is senior director of Cloud Computing Enterprise Solutions group at Dell. Prior to that, he was vice president of Enterprise Solutions for Enstratius Networks, a cloud management software company, which Dell acquired in May 2013. He is the author of three books on virtualization and cloud computing, including Virtualization for Dummies. Follow Bernard Golden on Twitter @bernardgolden.

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