Public Cloud Price Cuts

Not surprisingly, AWS had the biggest impact in 451 Research's latest Public Cloud Price Index (CPI).

Global price cuts on AWS' VM and storage services in late 2016 led to broad price declines in the overall market. The results were most evident in Asia-Pacific and Latin America.

Some observers speculated that using cheap VMs as 'loss leaders' in its cloud portfolio contributed to AWS' sales coming in below expectations in February. (Although, 'only' 47% growth versus the year-ago period is a problem other providers would love to have).

However, 451 Research data suggests that margins are still healthy for VMs, and the industry is far from commodity status.

Price Slashing
Other pricing moves also had effects on the CPI.
Google expanded its storage portfolio and cut prices. After Google reduced its Coldline archival object storage to $0.007/GB/month in the US - matching AWS's Glacier pricing - AWS lowered Glacier costs to just $0.004/GB/month.

Microsoft quickly followed with price cuts to its object storage service.

AWS, Google and Microsoft are playing a game of tit-for-tat, cutting prices in response to each other to avoid standing out as expensive.

Price Cuts for Compute, Object Storage
AWS' price reductions in late 2016 also included:

5-25% reductions in EC2 costs in all regions

S3 object storage price cuts ranging from 16-28% in the US, Europe and Asia

A 40%+ drop in Glacier archival object storage prices in the US and Europe

Globally, this contributed to an 8% reduction in the cost of the CPI's 'small basket of goods' (which includes VMs, bandwidth and block storage) and a 5% drop in the 'large basket' (which adds object storage and SQL/NoSQL-as-a-service databases).

VMs have been the primary battleground in the public cloud price wars, while value-added services had - until recently - held steady despite intense competition.

However, 451 Research's recent survey shows that the tide is turning: Object storage pricing dropped 14% in the US last year, and SQL-as-a-service pricing dropped 6% in the US.

This compares to a 5% reduction on VM prices.

Not a Commodity - Yet
Despite all the price cutting, the public cloud market is far from a commodity market.

For years, VMs were the only cloud services undergoing price cuts, while other cloud services continued to provide constant - sometimes growing - gross margins for cloud providers.

Over the past few months, price cuts have moved beyond compute, into storage and databases.

Cuts are moving beyond compute as a result of increasingly sophisticated buyers that have become more knowledgeable about broader cloud services due to increased cloud-native development and faith in the cloud model.

This is exemplified in the tit-for-tat responses to object storage price cuts by AWS, Google and Microsoft. No player wants to appear unreasonably expensive compared to its competitors, even if they feel they are adding value.

However, public clouds, and all the services they encapsulate, have a long way to go before they reach commodity status.

Opinions expressed by the author are not necessarily those of WITI.