According to 451 Research’s latest Cloud Price Index (CPI), the cloud services sector is a long way from being a commodity market. Price, the CPI indicates, barely affects market share, while value-added services comprise the real driver in the sector.
Amazon Web Services (AWS) and Google have been cutting virtual machine (VM) prices relentlessly for a while now, spurring some to refer to this tactic as a “race to the bottom.” And although 451 Research finds that VM pricing has dropped 12 percent on average over the past 18 months, it conversely found that the price of storage, load balancing, bandwidth, and other services has remained stable and continues to provide margins.
CPI data shows that the lowest-cost service providers have not won greater market share as a result of their pricing strategies. SDxCentral asked who these lowest-cost service providers are, and Owen Rogers, research director of 451 Research’s Digital Economics Unit, replied in an email: “I can’t name specifics, but they include telcos, more traditional hosting providers, and newer names too.”
Cloud customers’ sensitivity to price varies by region. 451 Research found that the U.S. is the region where a cheaper price is more likely to drive market share, and it’s also the cheapest market for cloud.
In Europe, customers pay on average 3 percent more than the U.S., and price has less impact on market share. In Asia-Pacific, cloud services cost about 19 percent more than the U.S., and price changes have minimal impact on market share.
“Despite all the noise about cloud becoming a commodity, our research demonstrates a very limited relationship between price and market share,” says Rogers. “In fact, the real drama is the race to the top rather than race to the bottom.”
Perhaps part of cloud providers’ strategy is to lure new customers with cheap VM pricing and then up-sell with value-added services.
“There is a general risk to all users of on-demand cloud services that they may consume more than they expected and then be liable to pay a big bill at the end of the month,” says Rogers. “Policies can control this risk.”
The CPI report says most cloud providers are pursuing two avenues to survive: expanding services and moving into less mature markets.