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Is Amazon really a low-margin cloud business?

Competitor calls out Amazon on being a low-margin cloud provider

By , Network World
August 01, 2013 12:42 PM ET

Network World - A startup competitor to Amazon Web Service's cloud computing platform is accusing the company of engaging in a "fake price war" and inflating the prices of its services.

The issue stems from comments made at AWS’s first-ever user conference last year in which AWS Senior Vice President Andy Jassy said the organization operates by the same tenets that guide its parent organization, Amazon.com the online retailer: High volume of sales, low margin of profit.

Andreas Gauger
Andreas Gauger

No one questions that AWS is a high-volume business, but low-margin? Andreas Gauger, Founder and CMO of ProfitBricks, and a veteran of the hosting industry, announced in a blog post a price cut in ProfitBricks’ services and in doing so accused the industry’s biggest players of misleading customers about their pricing. “Unlike the big players, we do not talk about a fake price war and fake low margins,” he wrote. “We just act.”

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The issue reflects a broader battle-royale among cloud computing companies that has evolved during the past year over pricing. AWS has cut prices on some portion of its cloud computing platform 37 times in seven years since announcing the service; in most cases the price drops apply to a small subset of AWS services though, Gauger points out.

AWS competitors have begun responding to AWS price cuts with reductions in the cost of their services as well. Microsoft and Google have each been known to drop prices directly after an AWS reduction, for example. Microsoft even went so far as to announce that it will match any AWS price drop moving forward on “core” services such as cloud compute, network and storage. Earlier this year it took Google a mere few hours to cut its prices after Amazon announced a reduction.

Startups and smaller competitors are getting into the cloud pricing game too. European IaaS providers CloudSigma announced a price drop recently, although CloudSigma claims it was fueled by efficiencies the company has created in its system and wasn’t done in response to AWS.

ProfitBricks, a 1-year-old startup, is doing the same. The difference with ProfitBricks is that company executives are calling out Amazon this time.

“I don’t see a price war or a race to the bottom,” Gauger said in an interview. “It’s all a nicely-played PR stunt.” After running the ProfitBricks IaaS for a year, Gauger said the company’s costs have gone down much faster than the 50% price cut the company announced this week. “Cloud computing prices are inflated,” he says. Based on his experience running a cloud company, he estimates that AWS gross margins could be more than 50% (meaning the difference between revenue and cost of producing the product before taxes and other costs are incurred) on some products. He says ProfitBricks had healthy margins, and Amazon has even greater scale, which leads to even cheaper costs and likely even higher margins.

ProfitBricks cut its prices this week by about half: dedicated, single-tenant, single-CPU core servers dropped from $0.05 per hour to $0.025 per hour. It’s difficult to do an apples-to-apples comparison of ProfitBricks and AWS prices, but AWS’s smallest instance size comes with 1.7GB of memory and 160GB of instant storage for $0.06 per hour.

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