The Cloud Storage Price Wars - Bad for Everyone

Amazon, Microsoft, and Google have been in the midst of a cloud service pricing prizefight for a while now, with Google, Microsoft, and Amazon all announcing price cuts on their cloud offerings back in March. Those massive cuts (36% to 65% from Amazon, 32% to 85% from Google, 27% to 65% from Microsoft) were just the opening blows of the conflict, and now injuries are starting to manifest on the fighters. Before we get into that, here's a brief explanation for the origins of the cloud pricing wars.

The two main reasons for cloud service pricing being driven down are as follows:

  1. Physical storage media is becoming cheaper.
  2. Massive demand is causing the Big 3 (Amazon, Microsoft, Google) to build massive hosting centers, making hosting cheaper.

These two factors, along with the ability of the Big 3 to absorb losses quarter after quarter, have led us to where we are today. So, on to th effects of the cuts.

Amazon's Q2 earnings were released just last week, with the online retailer carrying an operating loss of $15 million and projecting next year's operating losses at "between $810 million and $410 million, compared to $25 million in third quarter 2013." Investors reacted badly to the news, dropping the stock's value by 10% in after-hours trading. There's no doubt that the price cuts on Amazon's cloud services had an impact on its bottom line, with Amazon CFO Tom Szkutak admitting during the earnings call that the cuts "certainly did impact our Q2 results in a meaningful way."

When juggernauts like Amazon feel the pricing pinch, it's tough to imagine how smaller companies will be able to stay competitive. If you'll indulge an analogy for a moment, Amazon, Google, and Microsoft are like the big-box retailers (Target, WalMart) that squeeze smaller mom-and-pop grocery stores out of business. DigitalOcean, for example, targets developers with its cloud infrastructure offerings, a decidedly smaller market than the everyone and anyone that Amazon aims for. While DigitalOcean might offer more depth for a developer looking for an online platform, will the developer be able to justify paying a premium when much cheaper options are available so readily?

Even worse, the cloud dominance of the Big 3 could lead to stagnation in the market. With the Big 3 cutting into their margins more and more, they might eventually decide to reallocate resources into more profitable ventures, making for a stale cloud.

Pricing wars drive down consumer costs, but more importantly they drive down quality and competition. Here's hoping that the Rackspaces and Herokus can still find a space to occupy in the new cloud landscape.

Image from Lightningboy2000