How low can cloud pricing go?

If there’s one thing certain about Amazon Web Services (s amzn), it’s that the company isn’t Oracle (s orcl). On Thursday, the company slashed the bandwidth charges for its various services, the latest in a series of price cuts dating back to 2008. Giving away services is a strange pastime for an IT company, but it speaks volumes about the democratizing effects of cloud computing and the economies of scale it can provide.

New rates

With the latest round of price cuts, inbound data transfer to AWS is free (down from 10 cents per gigabyte) and outbound data transfer rates are cut by 20 percent to 38 percent depending on how much data a user is moving. Outbound bandwidth has long been the focus of AWS price reductions. Today, that price dropped to 12 cents per gigabyte from 15 cents per gigabyte. When AWS launched, the first 10 terabytes per month cost 18 cents per gigabyte.

Price reductions are also in place for AWS’s CloudFront CDN service, which also has a new pricing model that encompasses more data volume per pricing tier.

The free inbound data-transfer is part of an impressive free tier of AWS services that touches about every product in its portfolio. Some usage levels are perpetually free, while others are free only for the first year.

Why keep cutting prices?

There are two likely — and non-monopolistic — explanations for why a company with such a dominant market position would continually drop prices like this, and they’re interrelated. One is that the economies of scale AWS achieves via its massive operation allow it to offer lower prices on everything from computing to bandwidth.

The company has stated recently, “Every day Amazon Web Services adds enough new capacity to support all of’s global infrastructure through the company’s first 5 years, when it was a $2.76 billion annual revenue enterprise.”

The other reason is that cloud computing democratizes access to resources. AWS knows it can’t pull the Oracle strategy of locking customers in and then bending them over a barrel, so to speak. AWS has a seemingly insurmountable innovation lead among cloud providers, but it doesn’t always have the lowest prices.

And some providers, including Microsoft (s msft), are also experimenting with free tiers and free trials (although whether they stack up is another question). Microsoft, in fact, just announced free inbound data transfer for Windows Azure, although outbound transfer remains at a flat rate of 15 cents per gigabyte.

To the extent that AWS’s collection of additional services (e.g., Elastic MapReduce, CloudFormation, CloudFront, etc.) are superfluous, particularly budget-conscious users will go where they can get what they need at the lowest price. Whatever degree of lock-in exists in terms of application rewriting pales in comparison to the legacy model of sunk hardware investments and software licenses.

Cloud computing pricing isn’t all about a race to the bottom — there is something to be said about value-added services — but providers are wise to cut prices if they can maintain acceptable margins while doing so. Because if they don’t, someone else will.

Feature image courtesy of Flickr user Michael David Pederson.