It’s nothing not new to say that there’s a battle raging amongst the cloud providers for the price of compute, storage and networking. Amazon started everything off with regular price cuts — mostly to its own Amazon Web Services to begin with, but now it’s fighting with Google and Microsoft.
The core services such as EC2, GCE, S3 and Azure VMs are commodities because such basic services are not differentiated, aside from small feature differences. This is the commodity pricing battle — as each provider uses its scale to produce more efficient data centers, it is able to pass on the savings in raw compute, storage and networking costs directly to customers.
Such scale makes it very difficult for other providers to compete because they have to be able to invest the huge sums of money to execute on otherwise crazy projects such as laying their own trans-Pacific fiber or building their own electricity sub-stations. Indeed, this is why public cloud is usually a better choice than building your own data center.
Yet this doesn’t mean it’s a race to the bottom — there’s more than one battle being fought in the cloud war. Commodities are low-margin products used as components to create much higher-margin goods, and all three cloud providers offer a range of additional services built on top of the commodity infrastructure. These are products like DynamoDB, BigQuery, Stream Analytics, API Management, CodeCommit and Global Load Balancing.new instance types related features being announced most of the new releases are for portfolio products
Software is a very high-margin business. When you have a highly efficient underlying infrastructure, you can price based on value, which leads to a healthy profit. There are some concerns about Amazon’s resources in relation to the effect of the commodity-style pricing, but that ignores where the real profit comes from — software, delivered as a cloud service. This is important in the context of the cloud vendors’ ability to spend on infrastructure improvements.
It also means that companies such as Google, which have very strong core engineering cultures, can compete by productizing systems they already have in-house. Google already had an incredibly efficient and large-scale infrastructure powering its consumer products, and that’s allowed it to rapidly release new features in Google Cloud Platform. Microsoft is not dissimilar with its own software engineering abilities.
The problem for any would-be competitor is that there’s a very high barrier to entry if it wants to compete with the commodity products. You need to at least match the level of scale and efficiency to hit the pricing points of the Big Three before you can even start to be competitive. This is why we saw [company]Rackspace[/company] adjust its strategy, focusing on the “managed” aspect of hosting rather than trying to directly compete on compute, storage and networking — even though it had existing data center deployments around the world.
Commodity means self-service through APIs and DIY management consoles; support is extra. That’s a good model if you can build systems yourself (or have in-house teams to do it for you), but it isn’t necessarily appropriate for the vast majority of small and medium companies that want everything managed for them, and it makes Rackspace’s managed services a valid differentiator.
Going after developers is another way to differentiate. Providing a fast deployment model and very simple services is how Digital Ocean has been able to grow its customer base so quickly. Compare this to the way Twilio took over the developer mindshare for the old SMS telephony business, or how Stripe reinvented the way developers work with payment processors. But it can’t be said that Amazon, Google and Microsoft ignore developers — indeed, both Google and Microsoft have very strong connections in the developer communities, so this may be a risky strategy. It will be interesting to see how Digital Ocean maintain its lead.
Where does this place other cloud competitors? As noted by Stephen O’Grady at Red Monk: “Such businesses must differentiate themselves quickly and clearly, offering something larger, more cost-competitive players are either unable or unwilling to.”
Location seems to be part of the strategy for IBM/Softlayer, combined with its push for big data and analytics with the Watson software line. What about Verizon, HP, CA, Cisco and Oracle? These players have yet to reveal how they intend to differentiate, and they need to do soon or risk being left behind. The war is fought on many different fronts. Focusing on a single battle will not end well.