Cloud companies – most notably Microsoft, Google and Amazon – have been engaged in a price war over the last two years, so much so that customers have started to expect annual decreases in prices. While it is good to see consumers benefiting from the decreasing price of commodity hardware and computing resources, it is inevitable that there will be an end to the price slashing eventually.
Obviously the cost of computing will never be zero and these companies will have to stop when it is no longer possible to slash prices further than they already have. At present, more companies are being enticed by the lower prices that managers are overcoming their sense of risk or fear to move their applications to the cloud. This means that revenue is generally increasing, even if profits are not. Once the majority of organizations have adopted the cloud, it will be difficult for these companies to sustain revenue growth.
While Microsoft and Google subsidize their cloud platforms with revenues from other divisions, Amazon’s shareholders are willing to wait for a return on their investment enabling them to hold off on profitability. However a prolonged price war is not something that smaller players can afford. On the other hand, it also appears that the industry is fast approaching the stage where enterprise clients expect more from their cloud providers than just being the cheapest.
It is no coincidence that cloud companies – not just the big ones – are investing in diversifying their portfolio of services, from IaaS to SaaS. Cloud vendors are building up their expertise across the cloud stack so that clients who start out by testing one service are attracted to other features as well. It is a strategy that has worked well in the past, with Apple being the prime example. Consumers who started out buying the iPhone slowly gravitated towards other Apple products such as their laptops or tablets. Enterprises are not as easy to convince as consumers but this tactic could work out well for cloud vendors too.
In the meanwhile, cloud providers will have to differentiate themselves from the pack on terms other than prices. The differentiating factor could be anything from best in class customer service to ironclad SLAs/quality guarantees. For example, Microsoft wants to leverage its position within the enterprise to benefit its cloud computing platform, Azure. A large number of businesses have legacy applications and software which run on Microsoft code and they are more likely to choose Azure as they are already familiar with the system.
Another way for service providers to differentiate is to specialize in market niches. Small businesses will have different requirements (not to mention financial resources) when compared to large organizations with well budgeted IT departments. Similarly, companies in specific sectors might require more expertise or customized services to suit them. Still others will have compliance requirements with international laws, so there are many parameters for providers to compete instead of on price alone. In the meantime though, customers are certainly enjoying the benefits of the pricing wars even if it has to end sooner or later.