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Price Reduction in Aisle Five! Are Cloud Prices Really Dropping?

December 8, 2014

It makes great news copy when the mega-scale public cloud titans race to the bottom on pricing. Does that mean that cloud computing platforms are getting less expensive and, therefore, returning a better ROI? As with many things, that depends on which cloud services you use for what purpose and what your expectations are of a cloud services provider (CSP).

If all you want are virtual machines and basic storage, then the answer probably is yes. For these “commodity” cloud products, you will save money. In some pricing models, the more of these commodities you consume, the greater your savings will be.

This being the holiday season, we’re reminded of the insanity that surrounds Black Friday shopping door-buster deals. The retailer’s objective is to put its loss-leaders out there in hopes that you’ll stick around to buy more realistically priced stuff; that is, if you haven’t sustained bodily injury fighting over the last flat screen TV.

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So, let’s say you provision a bunch of cheap VM instances. One VM is pretty much like another, right? To a point. How important is the availability and performance of these VMs? Who will you call if you have issues and what level of response is acceptable to you? Did you buy too many or not enough? Are you sufficiently confident that your provider “relationship” will endure so that you won’t have to pull up stakes and move somewhere else? All these represent potential costs beyond the price/VM.

It‘s much more difficult to get a grip on price competitiveness of products and services beyond the fundamentals, assuming that things like databases, storage tiering, fast data retrieval, workload migration assistance, 24/7 support, disaster recovery and other services factor into your IT requirements. If offered at all, such services will be priced very differently among the giants. These are not their door-busters, but once they get you into the store, they hope you’ll stick around to buy more.
The 451 Research Group has created a Cloud Price Index. Based on a fixed “basket” of cloud products, the firm tracks over time what each of the Big Three charges for that basket and reports on the price spread for each item in the basket. In the conclusion section of the 451 Research Group’s November 10th report, author Owen Rogers wrote, “Some services, like virtual machines and storage are “commoditizing” but, then again, there are other services that the cloud providers see that are adding greater value. Gross margins on some services are likely to decline but, because of the opportunity to upsell other services, this does not mean service-provider net profit margins are likely to decline also.”

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No one makes much money selling commodity products, hence the up-swell of interest among mega-scalers to incrementally add differentiating products to limited portfolios. Their customer interaction model, however, remains no- to low-touch. Consumers are left to roll their own.

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This is where multi-vendor hybrid cloud strategies can pay big dividends for cloud services consumers in the future. Imagine seamlessly and dynamically moving in and out of provider infrastructures to take advantage of the best commodity pricing at the time, or playing one provider off another. At the same time, use other CSPs for higher-value or managed services, planning assistance, solution “right-sizing,” real-time engineering and technical help, i.e. a true extension of your IT operations.

Deals that appear too good to be true generally are. But again, that depends on an individual’s requirements, expectations and expertise, as well as the fine print. Cloud service consumers owe it to themselves and their businesses to paint a longer-term picture of what their IT/BT requirements will be in order to acquire services that will take them there with a minimum of disruption and maximum value-creation.

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