A new report from 451 Research theorizes that the “race to the bottom” of public IaaS cloud prices is an unsustainable model that is not expanding market share. Instead vendors have transitioned to a “race to the top” to add higher-level application services on top of their clouds to grow their businesses.
Three years ago IaaS vendors dropped prices regularly, sometimes within hours of each other, in what appeared to be a race to the lowest prices in the cloud. Today, public cloud IaaS vendors focus much more on providing higher-level application services that run on top of their infrastructure in an effort to attract and retain customers.
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“Despite all the noise about cloud becoming a commodity, our research demonstrates a very limited relationship between price and market share. Certainly, being cheap doesn’t guarantee more revenue, and being expensive doesn’t guarantee less. Cloud is a long way from being a commodity,” said Dr. Owen Rogers, Research Director of 451 Research’s Digital Economics Unit. “In fact, the real drama is the race to the top rather than race to the bottom."
The race to the top is not new, and has manifested itself in a variety of ways. This year cloud vendors seem to be focusing on a handful of areas, including machine learning (this was a major focus at Google’s GCP Next event and has been a big focus for IBM with its Watson platform). Other vendors are focusing on serverless computing and event-driven computing architectures. AWS Lambda and Microsoft Functions are examples of these efforts. “Supply of higher-value services is key to long-term, sustainable and profitable growth,” Rogers says.
IaaS vendors still are dropping prices though. 451 found an average 12% drop in the price of virtual machines over the past 18 months; storage, database and load balancing prices have remained stable during that timeframe. “As the price for cloud compute continues to fall toward zero, the hyperscale vendors will add higher-value cloud services as quickly as they can – aka ‘moving up the stack’ – recognizing that the margins currently enjoyed on bulk sales of compute resources are not sustainable,” the report notes.
Stay tuned for the rest of 2016 and into next year to see exactly what higher level services these IaaS vendors focus on, and whether prices continue to drop even as vendors move up the stack.