A virtual server in the cloud is a commodity. There are countless cloud computing providers, and for the most part, a basic cloud server is the same everywhere. You get access to some number of virtual CPUs, some amount of memory, and some amount of storage. Customer service and reliability can give a provider an edge, but those provide little in the way of pricing power.
There are many cloud computing users, particularly small businesses, that have no interest in the management and administrative tasks associated with cloud infrastructure. They don't want to deal with firewalls and backups. They want their servers to try to recover if something goes wrong. They want monitoring and alerts to let them know if something crashes. They want a WordPress server they can set and forget.
And, importantly, they're willing to pay far more for the same resources. That's the big opportunity DigitalOcean (DOCN 0.28%) unlocked when it acquired Cloudways earlier this year.
Paying a premium
If you spin up a virtual server on DigitalOcean or any other cloud provider, you're pretty much on your own. DigitalOcean offers support and plenty of helpful content, but the task of managing the server is up to you. This can get complicated when the number of servers multiplies, or when complex applications like databases are involved.
Cloudways is a managed cloud hosting company. It takes a DigitalOcean virtual server, or a virtual server from a few other providers, and layers functionality on top. A Cloudways customer is free from many of the annoyances of running servers in the cloud.
DigitalOcean acquired Cloudways to capture a greater number of small business customers willing to pay more for managed cloud services. One pillar of DigitalOcean's growth strategy is to grow its relationships with existing customers. The acquisition of Cloudways fits in perfectly.
How big is the opportunity in managed cloud services? Here's an illustration. On Cloudways, a virtual server hosted on DigitalOcean using premium processors with 2 cores, 4GB of memory, 80GB of storage, and 4TBs of bandwidth is priced at $50 per month. That same virtual server bought through DigitalOcean directly, without any of the features Cloudways provides, is priced at $28. That's a markup of nearly 80%.
Customers pay that markup because the higher price is worth paying. Those customers want a simpler cloud experience, and they're more than willing to pay for it.
Managed databases are another good example. DigitalOcean has offered managed database products for a few years. Instead of a customer spinning up a virtual server, installing database software and any dependencies, and then handling the management and administration of a complex piece of mission-critical software, DigitalOcean's managed database offerings remove much of that burden.
The markup here is also significant. A managed database from DigitalOcean running on the same virtual server as in the previous example, except with about half as much storage, is priced at $60 per month. That's an even bigger markup than a Cloudways server. Databases are such a critical component of any infrastructure that small businesses are happy to pay a premium to make sure they remain operational and performant.
Making the cloud easy
DigitalOcean's mission is to make cloud computing simple. The company has come this far by focusing on simple, competitive pricing, extreme ease-of-use, and solid support and resources. The next phase of the company's growth will feature a heavier mix of high-value managed services.
Managed services are exactly what many small businesses want. DigitalOcean CEO Yancey Spruill outlined a pattern he sees with new DigitalOcean customers during the third-quarter earnings call. They find the company through its content and tutorials, create an account, but then leave after a few months. A common reason is that those customers were looking for more help.
Providing that help is how Digital Ocean will differentiate itself from a host of other cloud computing providers, and it's how the company will improve its profitability as it shoots for $1 billion of annual revenue by 2024.
