A ripple went through the cloud platform industry on March 25, 2014 when Google drastically cut its prices below that of its rivals in this market segment. The price for Google’s Cloud Storage dropped 68% to as low as $0.026 per gigabyte. On-Demand Compute pricing was cut 32%; data-analysis service BigQuery saw a pricing cut of 85%.
Amazon followed suit the next day with similarly drastic price cuts that in some categories, such as compute, are competitive with Google, and with other categories are not at parity.
One week later, Microsoft announced a similarly drastic price cut of its Azure cloud services, matching Amazon’s pricing, but still falling short of Google’s cutthroat pricing.
Free-market competition or cheap access to commodity hardware
Typically, when big businesses are forced to compete on pricing, the consumers win. Cloud is certainly big business, but for all of these firms, cloud services are side ventures that complement an existing product lineup.
Amazon’s cloud offerings are an outgrowth of a technology platform built for its primary business: online shopping. Google is a search (or perhaps advertising company) with a vast product portfolio that changes nearly monthly. Microsoft’s cash cow is software: Windows and Office. (Also, holding patents and squeezing Android device manufacturers for money, a more profitable endeavor than Microsoft’s own mobile offerings.) In fact, Microsoft’s consumer cloud services have had a very bumpy history.
All this to say that, while cloud is an important market segment, it is not quite the bread and butter of any of these companies. In comparison, for companies such as Rackspace that are not greatly diversified, the present pricing war is one that they simply cannot afford to join — razor-thin profit margins will not work for smaller organizations like Rackspace.
John Engates, Rackspace’s Chief Technology Officer, told The Register:
“We pay close attention to market conditions and make periodic adjustments to ensure that our prices are competitive on a total-cost-of-performance basis… We do not base our prices on competitors’ rental rates for raw infrastructure. Rackspace has for 15 years charged premium prices for premium service, expertise, performance and reliability.”
There are upsides and downsides to this strategy.
Why not competing on price might work
Engates’ argument for expertise and reliability holds water. Bare bones access to hardware is only one aspect to this — actual support from actual people has real value. If, even through your own fault, a situation occurs in which things become spectacularly broken, Rackspace has a proper tech support infrastructure.
Being able to deliver premium support is one check in Rackspace’s favor. With the litany of IT horror stories that the collective readership of this website has, the necessity of tech support should not be in doubt, even when those needing support are people who would be otherwise considered technically adept.
Why not competing on price might not work
Cloud services are ultimately a commodity. Corporate bean counters are unlikely to see the upside to managed support of Rackspace — they already pay salary to their own in-house IT, after all — and if a particular project were to go completely pear-shaped, outside contractors could be brought in to clean up the mess. In addition, IT types are typically not predisposed to adding more people along the decision-making chain, as this only creates more work in coordinating decisions, and wasted time in negotiation.
Our new cloud overlords
The claim could be made that these actions by Google, which were subsequently nearly matched by Amazon and Microsoft, is predatory pricing. Squeezing out smaller competitors such as Rackspace is not good for the overall health of the industry. However, smaller vendors tend to be ignored in a “strength in numbers” analysis that leads people to larger firms under the notion that they would be more reliable.
Have you or your organization jumped ship for cheaper waters as a result of these pricing adjustments? Are you remaining committed to your current cloud services provider? Let us know in the comments section.
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