The Big Losers in the Cloud Pricing Wars

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Recent massive price cuts for cloud services by Amazon (NASDAQ: AMZN  ) and Google (NASDAQ: GOOGL  )  have taken the industry by storm. Google first set the stage by announcing it had slashed the price of its cloud services by 30%-85% to better compete with Amazon and Microsoft  (NASDAQ: MSFT  ) . Google's cloud storage will now cost just $0.026 per Gigabyte, which is roughly 65% cheaper for most of its customers. Also, the price of the company's compute engine services was lowered by 32%.

Barely a day later, Amazon followed Google's lead by announcing its own cloud price cuts ranging from 10%-65%, or an average of 51% across the board. Amazon owns and runs the highly popular Amazon Web Services, or AWS, which has helped propel the former online bookseller to the largest online retailer for a wide variety of merchandise.

During its announcement, Google noted that the price of virtualized hardware had been steadily falling by 20%-30% per year, while prices of cloud services have been dropping by just 8% per annum. Investors have been left wondering, who are the biggest losers in this pricing war, and who are the winners, if any?

Amazon will hardly feel the pinch
Amazon is likely to be hurt the least by the price cuts, at least not as badly as the other players in the industry. Its margin for AWS will likely fall considerably with the price cuts. But, the company might compensate, at least partly, by growing its user base even more. A recent Gartner study revealed that cloud adoption by enterprises stands at just 2%, with about 47% of companies planning to move their core ERP systems to the cloud within the next five years. There is still plenty of room to run for leading players such as Amazon.

AWS is so popular and powerful that it has five times the computing power of the 14 leading players in the industry combined. The price reductions have placed Amazon even further ahead of the curve, and it's difficult to see any reasonable challenge coming its way soon.

Small cloud upstarts are the biggest losers
Nearly a fortnight ago, Peter Goldmacher, a Cowen & Company's analyst, offered his findings about big data going mainstream. According to Goldmacher, cloud start-ups such as DataStax, Lotame, Hortonworks, Couchbase and Vertica were spending heavily on self-promotion and the promotion of big data, and looked likely to upstage large legacy players such as Oracle and SAP.

Now, it's a whole new ballgame. Last year, ProfitBricks, a cloud services start-up, surprised everyone when it announced that it would offer exclusive infiniband-connected cloud at half the price of AWS. But, that does not necessarily mean that other cloud start-ups can follow the same route. The huge price cuts are likely to cut margins to the bone, and for small start-ups without deep pockets like Amazon, Microsoft, Google, SAP, or IBM (NYSE: IBM  ) , this could be a problem.

Microsoft is likely to follow suit
If past events are an indication, Microsoft is likely to also lower the price of Azure. When Amazon cut the price of AWS in 2012, Microsoft countered by lowering the price of Azure storage-as-you-go service by 12%, the price of six-month Azure Storage by 14%, and the price of Windows Storage Small Compute by 50%.

IBM is a wild card
IBM has been ramping up its SoftLayer cloud business. The company announced several new cloud platforms early this year. SoftLayer has special features such as bare-metal cloud capabilities that set it apart from competitors. The company might decide to use this edge and maintain its current pricing structure.

Oracle's cloud to face even more pressure
Even before Amazon and Google announced their price cuts, Oracle (NYSE: ORCL  ) chief executive Larry Ellison acknowledged that cloud services had become commoditized and were eating away at the company's profitability; software sales fell short of expectations last quarter.

Oracle plans to launch several new cloud offerings to entice customers to take a bite of its cloud. These include:

  • Updates on Fusion apps
  • In-memory technology on its Database 12c
  • Launch of the company's PaaS, or platform-as-a-service, and IaaS, infrastructure-as-a-service, cloud offerings to the masses

Foolish bottom line
It might be a bit early to accurately predict how the rapidly changing cloud space will pan out. But, it's quite likely that smaller players will be the hardest hit, while bigger players will simply lower prices to stay competitive and carry on with business as usual.

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  • Report this Comment On March 31, 2014, at 7:44 PM, zippero wrote:

    The biggest loser in the cloud price wars is Google, which spent $7.4 bil. on capex in 2013 (up from $3.3 bil. in 2012) to boost its cloud/data center offerings at the expense of its core advertising biz that never required such huge capex. $7.4 bil. is 60% of Google's 2013 net income, and capex will probably eat up 100% of Google's 2014 net income. Google's hard-earned, monopoly profits from its core, asset-light searchword advertising biz arebeing wasted as we speak on the low-margin capital-intensive cloud biz where there's no pricing power and daily, minute-by-minute price wars.

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