In Christopher Nolan’s The Dark Knight, Bruce Wayne’s longtime servant and friend, Alfred Pennyworth, says of The Joker, “Some men aren’t looking for anything logical, like money. They can’t be bought, bullied, reasoned, or negotiated with. Some men just want to watch the world burn.”

Anyone watching the Infrastructure as a Service (IaaS) pricing wars might feel something similar is going on in the cloud.

As analyzed by Redmonk analyst Stephen O’Grady, “The overall trajectory for nearly all [IaaS] providers is down,” with Amazon Web Services (AWS) leading the race to zero. In this game of chicken, however, the AWS strategy isn’t all about zero. In fact, new services like Amazon Aurora show that it cares very much about margins.

Or, rather, destroying the margins of competitors.

Playing chicken with pricing

Enterprises can be forgiven for thinking Christmas has arrived early. For years, AWS has consistently lowered prices. At last count, in fact, AWS had dropped prices 45 times, pushing the market to follow suit, as O’Grady displays (Figure A):

Figure A

Average base IaaS price over time.

AWS cloud chief Andy Jassy insists, however, that this isn’t about competitors:

“[AWS prices] have come down largely in the absence of any competitive pressure to do so, so we don’t do it for show. And we don’t do it to try to create attention for ourselves…. Whenever we’re able to create efficiencies in our cost structure, instead of pocketing that as savings, we just give them back to customers in the form of lower prices. So that’s why we have very consistently taken our prices down. And I expect that to continue.”

Maybe, maybe not. But it’s certainly having an impact on its competition. While Microsoft and Google can afford to relentlessly invest in infrastructure and then give it away for low or no margin, smaller competitors can’t. Those smaller competitors are feeling the sting every time AWS blesses its customers with lower prices.

This is made even more difficult for competitors — big and small — by AWS’ dogged determination to innovate. The cloud hegemon will release roughly 500 new features this year, up from 280 last year. As Gartner analyst Lydia Leong notes, because Amazon is “almost always first to market with a feature… they force nearly all of their competitors into playing catch-up and me-too.”

Catch-up on innovation, and catch-up on pricing. It’s a very difficult game to play when AWS is setting the rules.

Eating away at enterprise IT

This blisteringly low pricing for storage and compute, however, is more than made up by the introduction of high-end services. From Amazon Redshift, an enterprise data warehouse, to Amazon Aurora, a high-end relational database, AWS keeps introducing new services that pit it against the fat and lazy old guard of enterprise IT.

Such incumbents have lots of margin, margin that AWS is only too happy to pilfer, as a recent Morgan Stanley analyst report suggests:

“Aurora… may compete directly with Oracle (roughly half of all [database] spend), IBM and Microsoft relational database management systems, which according to Gartner is an annual $25-30B market. MySQL leads in open databases but lags Oracle’s traditional database platform. Amazon believes that its competitive advantage may came from the deep integration Aurora has with existing AWS infrastructure, allowing firms to keep all of their workloads easily managed on a single platform. Aurora is MySQL compatible, which they believe should make it easy for IT administrators to port their implementations to Aurora. Jassy believes that Aurora provides 5x performance, and at $0.29 / hour, 1/10th the cost of existing database solutions.”

Amazon’s strategy, then, seems to be to “keep[] pricing low enough to prevent it from being a real impediment to adoption, while growing its service portfolio at a rapid pace,” as O’Grady posits. He continues, “Amazon is able to get customers in the door with minimal friction and upsell them on services that are both much less price sensitive than base infrastructure as well as being stickier.”

Again, this upselling is coming at the expense of the incumbents, and not really Google or the transformed Microsoft.

As such, when you hear companies like Oracle declare themselves serious competitors to AWS, it’s important to remember that in Amazon’s race to zero, the old guard IT incumbents are road kill.