The Implications of IaaS Pricing Patterns and Trends
Unsurprisingly, the overall trajectory for nearly all providers is down. And the exception – Microsoft – appears to spike only because its base offerings today are far more robust than their historical equivalents. Which raises many questions, the most common of which is to what degree the above general trend is sustainable: is this a race to a bottom, or are we nearing a pricing floor?
While we are far from having a definitive answer on the subject, early signs point to the latter. In the week preceding Amazon’s re:Invent, Google announced across the board price cuts to varying services, on top of an October 10% price cut. A week later, the fact that Amazon did not feel compelled to respond was the subject of much conversation.
One interpretation of this lack of urgency is that it’s simply a function of Amazon’s dominant role in the market. And to be sure, Amazon is in its own class from an adoption standpoint. The company’s frantic pace of releases, however – 280 in 2013, on pace for 500 this year – suggests a longer term play. The above charts describe pricing trends in one of the most basic elements of cloud infrastructure: compute. They suggest that at present, Amazon is content to be competitive – but is not intent on being the lowest cost supplier.
By keeping pricing low enough to prevent it from being a real impediment to adoption, while growing its service portfolio at a rapid pace, 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. In other words, instead of a race to the bottom, the points of price differentiation articulated by the above charts may be less relevant over time, as costs approach true commodity levels – a de facto floor – and customer attention begins to turn to time savings (higher end services) over capital savings (low prices) as a means of cost reduction.
If this hypothesis is correct, Amazon’s price per category should fall back towards the middle ground over time. If Amazon keeps pace, however, it may very well be a race to the bottom. Either way, it should show up in the charts here.
Disclosure: Amazon, HP, IBM, Microsoft and Rackspace are RedMonk customers. Digital Ocean, Google and Joyent are not.