For most people the cloud is a vaguely defined place where they back up their music, movies, and pictures. For Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) it's a battleground over customers. 

In addition to serving as a place for individuals to back up their personal data, the cloud has become a location for companies big and small to host their websites. Gone (or at least leaving) are the days when websites are hosted either on an actual computer located on-site or in a server farm where companies lease a dedicated box. The cloud offers a nearly endless ability to scale a website for a fraction of the cost of the old dedicated server model. Because of this developers are flocking to the cloud, and both Microsoft and Amazon want to bring them in to their services.

How cloud servers work

When a customer buys a cloud server, he or she is actually buying access to what Amazon describes as "on-demand virtual machines." The customer does not purchase or lease an actual computer, but instead buys an amount of computing power and storage capacity delivered by a network of megaservers. There are physical boxes involved but an individual customer is not tied to any one machine -- that's helpful because an individual box crashing won't bring your site down, it'll just be served from another part of the cloud.

Cloud servers work like traditional servers with a lot more flexibility. Under the old dedicated box system, a company would have to purchase or lease a server based on guesses as to what size it would need to be. If the company got more traffic than it expected or had a need for more space, it would have to move to a bigger box or add another server. The same was true if a company guessed it would be more successful than it turned out to be ... and it would be paying for space and capacity it wasn't using. It was an imprecise game that could get very expensive.

Servers in the cloud not only cost less in general than their physical counterparts, they allow companies to scale up or down as their needs change. If you see your traffic climbing and your cloud server nearing capacity, the size of the server can be increased with a few clicks. Capacity can be scaled down just as easily, allowing people and businesses to pay for what they are using rather than what they guess they might need.  

This is good news for customers

Server space has become a commodity, which has forced Microsoft, Amazon, and some of the other players in the field to compete based on price as they are all offering essentially the same thing. Microsoft has pledged to match Amazon's prices and Amazon has been relentless in its efforts to lower costs. Amazon Web Services sent a letter March 27 with the subject line "AWS Cuts Prices on EC2, S3, RDS, ElastiCache, and Elastic MapReduce." The letter detailed the price cuts, as "our 42nd price reduction since 2008 and we're happy to continue the tradition of making AWS more cost-effective over time." 

Microsoft responded by posting news about matching price cuts on its Microsoft Developers blog:

Consistent with our previously announced commitment to match Amazon on prices for commodity services, we are cutting prices on compute by up to 35% and storage by up to 65%. We recognize that economics are a primary driver for some customers adopting cloud, and stand by our commitment to match prices and be best-in-class on price performance.

While price is important, and something that will continue to grab headlines, there are three key factors at play in cloud computing: innovation, price, and quality. Innovation and quality will prove far more important than commoditization of compute and storage. Vendors will ultimately extol their track records for building and running services far more than their prices and SLAs.

The blog posted also extensively detailed Microsoft's pricing. It's hard to compare prices directly as the packages and offerings are not strictly the same. It's safe to say Amazon is pushing prices lower, making it the cheapest time in history to buy server space, and Microsoft is following suit. 

How this helps Amazon and Microsoft

Worldwide spending on public IT cloud services will reach $47.4 billion in 2013 and is expected to be more than $107 billion in 2017, according to a new forecast from International Data Corporation. Over the 2013–2017 forecast period, public IT cloud services will have a compound annual growth rate of 23.5%, five times that of the IT industry as a whole.

"The emergence of cloud as the core for new 'business as a service' offerings will accelerate cloud adoption and dramatically raise the cloud model's strategic value beyond CIOs to CXOs of all types," IDC Senior Vice President Frank Gens.

While server space becoming a commodity lowers prices it also opens up a bigger audience for Amazon, Microsoft, and the other players. AWS has been the early leader but it remains to be seen who its main competitors will be.

"AWS has become the iPhone of the cloud space, and the Androids of cloud are in their early stages," cloud market expert Mark Eisenberg told Search Cloud Computing for its 2014 market survey.

Cloud services might be a lower-margin market with falling prices, but it's still a huge potential source of revenues with a rapidly growing customer base.

Why is this good?

Buying or renting a server used to be a pretty major barrier to entry for entrepreneurs. You might be able to dream up the idea for the next Facebook, but actually launching it in a way that could scale as you grow was a challenge. Now Amazon even offers a free tier, which allows customers free access for a year. The free access won't be enough for a successful site, but it lets customers test websites, launch new applications, and do other things that previously would have come with a price tag.

Microsoft does not directly match that offer, but gives new customers $200 in free credit on its Azure cloud offering.

Free access and constantly falling prices make it easier for businesses to justify taking risks and being innovative. Cheap access to servers is a lot like giving companies a deal on office space or lowering taxes -- it reduces a necessary expense and directly hits the bottom line. Amazon, Microsoft and other cloud companies are democratizing the web as pretty much anyone with a good idea and the ability to build it can now use a cloud server to launch their business. If it works he or she can scale up. If it doesn't he or she can learn from failing without running up credit card debt or borrowing money.

This price war is not only good for consumers it's good for the economy and should lead to an increase in innovation, business creation, and job growth.

Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.