IT services providers and their customers have come to expect that significant price cuts in public cloud computing services will occur on a regular basis. But, an analysis of recent price cuts by Amazon Web Services (AWS) conducted by Deutsche Bank suggests that those price cuts don't actually occur as often as people think.
Earlier this month AWS announced a five-percent price cut for certain EC2 compute services. What makes this price cut significant in the eyes of Deutsche Bank is that it’s only the second EC2 price cut since March of 2014. In addition, Deutsche Bank notes that as price cuts go five percent is not very much and this latest cut only applies to AWS Linux server instances. Price cuts to Windows, Red Hat Linux, and Suse Linux instances running on AWS were even smaller.
For the moment, it appears Amazon is now more focused on maintaining AWS profitability. In fact, AWS has become a significant contributor to Amazon's bottom line. Historically, Microsoft and Google have matched or beaten AWS price cuts. In the absence of aggressive price cutting by AWS, however, Deutsche Bank figures a slow pace of price cuts for core cloud services should bolster the margins of both AWS and other cloud service providers. That theory, of course, assumes neither Microsoft nor Google will initiate price cuts on core cloud services as part of a bid to gain share from AWS.
Even though AWS, Microsoft, and Google have a reputation for being aggressive on pricing, most IT services providers are aware that there are lower-cost cloud services available. In fact, there’s are a number of providers that offer cloud services on a wholesale basis, and IT services providers can opt to resell them as their own.
The question many of them need to ask is to what degree it makes sense to partner with AWS instead of offering their own branded cloud service. The fact is that as IT organizations become more familiar with Infrastructure-as-a-Service (IaaS), the more they begin to think of it as just another commodity service. AWS clearly enjoys brand supremacy in the category, but achieving that supremacy and holding on to it are often two distinct propositions.
Future pricing threats
Of course, all this focus on pricing only reflects the state of cloud computing as it’s currently understood. The rise of containers such as Docker along with network function virtualization (NFV) software will more than likely drive down cloud costs even further. Cloud service providers would naturally prefer to hold on to as much profit margin as possible. But given the number of cloud service providers there still are in the market, pricing pressure on the current market leaders is only going to become more intense.
In the meantime, IT service providers would be well advised to distinguish between what market leaders say about massive price cuts on services that are not widely used and what they actually do when negotiating price points on the core services that drive the majority of their most profitable revenue streams.