Even as Microsoft struggles to simplify its pricing
for a host of software products, like Windows Server and Office, the public
cloud providers, including Microsoft, have come up with an even simpler
strategy: offer easy-to-understand pricing, and then consistently drop that
price toward $0.

In this race to the pricing bottom, however, it’s Amazon Web
Services (AWS) — not Microsoft — that leads the pack, according to a new RightScale report. Given AWS’ penchant for
improving its service, even while lowering prices, it’s hard to see the cloud
giant losing its leadership role. And with 70% of CIOs expecting to change their tech vendors over the next three
years, there are literally hundreds of billions of dollars at stake.

A race to $0

Richard Smith, general manager of Microsoft’s global licensing
and pricing division, declares that the software giant is “taking careful,
deliberate steps to introduce a next-generation approach to commercial
licensing with a new, more flexible and simplified purchasing experience across
all solutions.” It’s a nice thought, but it’s also increasingly irrelevant. As
more enterprise workloads move to the cloud, getting the right balance between
functionality and cost is critical.

Here, Amazon clearly leads, though Google this week dropped
prices in a way that clearly will get the attention (and possibly margins) of
AWS, as Jack Clark notes:

“Google’s price changes are significant
and represent a grave threat to Amazon’s business. G’bye Bezos’s treasured
margins.”

This theme of price competition, however, has resonated for
years, as RightScale’s findings show:

  • Amazon led on
    price reductions:
    In 2013, AWS set the standard in terms of frequency and
    size of reductions, forcing others to follow. AWS had the most price
    reductions, the largest price reductions, and focused on reductions in compute
    services, which are typically the highest percentage of a company’s cloud bill (Figure A).
    Figure A
     
  • Cloud prices
    continued to drop:
    In 2013, the four public cloud providers rolled out 25
    price reductions across compute, storage, and networking, up from 22 price
    reductions in 2012. AWS continued to lead the way, announcing 12 price drops in
    2013, down from 13 the prior year. Azure, Google, and Rackspace stepped up
    their pace, accounting for a combined 13 reductions in 2013, up from nine reductions
    in 2012.
  • Reductions in
    compute prices accelerated:
    There were twice as many price reductions on
    compute services in 2013 (10 reductions) compared to 2012 (five reductions). This
    is good news for enterprises who still allocate the vast majority (70%
    to 90%) of cloud spend to compute.
  • Reductions in
    cloud storage prices got larger:
    Cloud providers also focused attention on
    storage prices in 2013. Storage saw six price reductions across the four vendors,
    down from eight last year. However, the average size of the price decrease was
    larger in 2013 (32%) than in 2012 (20%).

Amazon keeps pushing the envelope on what enterprises should
expect to pay for cloud services. This wouldn’t be a big deal if AWS were the
low-end upstart hoping to price its way into enterprise hearts. But it’s not.
AWS is the market leader, and by a long way, as Gartner finds, both in terms of market
share and functionality.

If anything, this lead is growing, as then-director of cloud
for Netflix Adrian Cockroft opines:

“A barrier for people currently using
AWS is the feature gap to anything else. OpenStack not closing [the] gap.”

Despite this functionality lead, only Amazon has increased the
size of its cost reductions from 2012 to 2013, suggesting that no one is even
trying to keep pace with AWS, at least as regards price.

Discounting the database?

Nowhere is this more visible than when it comes to the
database. While most everything is cheaper, especially compute, one area hasn’t
been touched at all: the database. Despite improved database offerings from
Amazon and others, public cloud providers discounted the database least of all,
representing just 8% of reductions in 2013 compared to 14% in 2012 (Figure B):

Figure B

 

 

RightScale reductions by service.

But that’s not quite accurate. After all, one major cloud
provider did discount the database:
AWS. And quite a bit (Figure C).

Figure C

 

 

RightScale cloud price reductions.

Given AWS’ leadership, it’s safe to assume other cloud
providers will follow suit in 2014 — or not, given their unwillingness to follow
AWS down the price curve. It could also up the functionality curve, as Gartner analyst
Lydia Leong speculates:

“Many [AWS]
competitors haven’t had the willingness to invest the resources to compete …
they’ve failed to understand that this is a software business, where feature
velocity matters.”

How do you compete with free?

Two things are clear: first, AWS is a tough
competitor, one that will be tough to dislodge as it increases performance and
functionality, even while reducing prices. Second, and more importantly, no
matter which of the public cloud vendors wins the price war, customers
ultimately benefit most. Whatever the initial reticence to move workloads to
the cloud, those concerns are fading in light of the improved agility and cost
benefits derived from the public cloud, as well as the potential to keep some
workloads behind the firewall in a hybrid environment.