Cloud

Why Amazon's cloud dominance is about more than price cuts

AWS keeps imitating the best of Microsoft's platform approach, and enterprises are eating it up.

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Image: iStockphoto/maxsattana

Despite years of useless wrangling over whose cloud is cheapest, and endless price wars, we seem to have hit a floor on cloud infrastructure pricing. As Redmonk financial analyst Rachel Stephens finds: "[T]he trend of ever downward price pressures seems to be alleviating."

That's great, but the cloud has never really been about cut-throat pricing, and AWS' lead has never depended on offering "everyday lower prices." Even at its cheapest, AWS proved good margins could be made, with the cloud division generating 56% of all of Amazon's quarterly profit.

Instead, AWS market leadership has come from following its cross-town rival Microsoft's playbook, as Redmonk analyst Stephen O'Grady pointed out. AWS is a platform, and platforms—not pricing—are the best way to ensure loyal customers.

A price war that wasn't

Oh, sure. AWS has made a habit of aggressively lowering prices, with more than 50 price decreases since 2006. AWS tends to drop prices ahead of its competitors, making competition unprofitable even as its superior scale allows it to make money on higher volumes.

SEE: Attention AWS competitors: You can't buy first place

Even so, it is Google, not AWS, that has been trying to distinguish itself through lower prices. Stephens picks up on this, arguing that "Google remains the most aggressively priced," whether we're talking about memory or compute. It's a familiar refrain to those of us who watch the cloud market closely. A year ago, Google cloud executive Miles Ward told me that Google's cloud pricing "always" comes in lower than AWS.

But it hasn't worked. Not much, anyway.

The reason is that enterprise buyers aren't looking to the cloud to shave pennies or dollars from their budgets. Instead, public cloud is all about improving business agility, and this, in turn, benefits from going with vendors that can deliver a full stack/platform experience.

Waging war 'The Microsoft Way'

Which brings us to Amazon and its embrace of Microsoft's platform approach to software.

As O'Grady writes:

In the cloud...the player that appears to have learned the most from Microsoft's platform success ironically has not been Microsoft, but Amazon. What the companies have in common...is that they are both platform businesses. Amazon's Web Services business, it can be argued, is the new Microsoft, in the cloud. Which would imply that the AWS Management Console, as mentioned above, is the new Visual Studio.

AWS' intent to deliver "a complete, end-to-end experience for its customers" is "impressive bordering on intimidating," he continues, and it has resulted in enterprises—fueled by both their developers and IT—shifting workloads from private datacenters to Amazon's public cloud at a torrid pace.

SEE Big banks to move 30% of workloads to public cloud within three years

Gartner's Magic Quadrant for Cloud Infrastructure as a Service report echoes O'Grady's findings:

[AWS] has the richest array of IaaS and PaaS capabilities. It provides the deepest capabilities for governing a large number of users and resources. It continues to rapidly expand its service offerings and to offer higher-level solutions. It retains a multiyear competitive advantage over all its competitors, and thus is the common reference point for competitive benchmarking.

At some point, AWS could have garnered even greater profitability by slowing its infrastructure and product innovations, but it hasn't. It has done the opposite, choosing to play for long-term platform dominance rather than short-term economic gain. As a result, Gartner's Magic Quadrant clearly shows AWS completely outpacing all but Microsoft and Google, setting itself up for a richly profitable future.

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About Matt Asay

Matt Asay is a veteran technology columnist who has written for CNET, ReadWrite, and other tech media. Asay has also held a variety of executive roles with leading mobile and big data software companies.

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