The Crowded Cloud: Is Freemium Inevitable for Storage Services?

Who has the winning cloud storage strategy? The answer is all about pricing and position.

Jul 17, 2014 at 12:45PM

The cloud storage and collaboration market has reached new levels of rivalry as companies like Google (NASDAQ:GOOG) and Amazon.com (NASDAQ:AMZN) update their cloud platforms with SSDs, while Microsoft (NASDAQ:MSFT) announces new services. It's growing more obvious that the market isn't quite big enough for all these suppliers. When services become too similar, the key differential tends to be price, and success in this area is often defined by asking, "How low can you go?"

Price floors still falling for storage
Google, with its free Google Doc services and multiple Cloud Platform services, is in a good position to start pricing at the basement floor. Early in July, the company declared that customers could get two terabytes of storage on its public servers. There are some caveats, however, as the deal requires a Panzura download and only lasts for one year with a strict one-device limitation. But, it is still a blow to Microsoft Azure and Amazon Web Services, which offer similar services without as much free storage. Google, which offers even basic Drive users 15 GBs free, seems to be on the cutting edge of the pricing war.

Amazon.com, meanwhile, has announced Zocalo, an enterprise solution for managing and documents. The service requires a $5 monthly fee and comes with 200 GB of storage, which can be augmented by upgrades, if necessary. However, Amazon acknowledges its competition by offering a 50 GB free version of Zocalo to all those who already use Amazon WorkSpaces, with a discounted $2 monthly fee for the full 200 GB. This undercuts Dropbox in particular, which not only offers similar services, but also depends on Amazon servers for its storage space, making it nearly impossible to match prices.

As another competitor for the cloud market, Microsoft is expanding Azure and Office 365 in new ways, too, particularly with a focus on government cloud services. Dynamics CRM Online will integrate with other Microsoft services and be available for government agencies in 2015. This synergizes well with Microsoft's popularity in the business world, where many institutions adopted the company's software early long and have yet to look back.

Prices for Microsoft's Office 365, which start around $220 per year for small business users, remain relatively high, but the company is also working to bring them down with a new Basics version for only $60 per annual user. Meanwhile, Azure prices for computation and storage were both dropped in March 2014 to match or undercut Amazon's prices.

Freemium or bust
These "more free stuff" announcements are now coming every several months as the cloud war heats up. Fast forward a few years, and it's easy to imagine a cloud storage world where freemium with a sizable storage space is the new model, where all software naturally integrates with basic cloud services free of charge. All but the largest customers would pay only for extra features, like additional security or translation support.

Of course, this scenario would primarily affect basic cloud storage. Amazon, for example, still has the potential to make revenue from other business cloud services -- as much as $5 billion, according to a recent estimate from Pacific Crest Securities. Likewise, Microsoft's business focus has recently made it the second-largest cloud service provider.

But, the price war over storage and collaboration remains a key battleground. These ground-level offerings help individual users and small businesses pick a brand when first starting out, one they are likely to stick with for more complex services. It's a basic foot-in-the-door tactic, and it favors companies that can offer free stuff.

Final thoughts
As Microsoft CEO Nadella noted in a recent company memo, the freemium model is likely to start with subsidizing cloud services, particularly cloud storage, until prices are as low as they can get. Can they fall all the way to zero, or so close that the difference is hard for small businesses to spot? With around half of all businesses adopting hybrid cloud models by 2017, according to Gartner research, the pressure to drop prices will become intense. Providers that can move closest to freemium have the best chance at future cloud revenue, while companies stuck with monthly fees for basic storage (eyes on you, Dropbox) may be in for some unpleasant trends.

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Tyler Lacoma has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Google (C shares). The Motley Fool owns shares of Amazon.com, Google (C shares), 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.

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