Google has announced major price reductions for its computational and storage cloud computing services, ostensibly presenting a new challenge to rivals Amazon Web Services - the market leader - and Microsoft Azure.
Google is reducing computational services by as much as 32 per cent, and storage prices up to 68 per cent. This matches or beats price cuts previously announced by Amazon and Microsoft.
But there's more going on here than just a price war; this is about capturing customers and market share in the already crowded and increasingly competitive hosting and infrastructure services market. Vendors such as Microsoft and Amazon are betting that volume will make up for lower prices in the long run, which fuels the pricing wars.
For the channel, though, Google's price slashing is a reflection of pain they're already feeling. According to research by The 2112 Group, the average solution provider earns less than 15 per cent of their revenue from the sale of cloud computing products. The average profit of cloud products is falling, though, as it's getting harder in this competitive environment to make money off cloud product sales.
Much of the pricing war attention is paid to Amazon, Google and Microsoft, as they are the most visible of the cloud service providers. But there are more than 1,500 sizable cloud infrastructure providers around the world and scores of additional smaller service providers that offer various cloud services. All are competing for a piece of what research firm Gartner says is a $131bn (£79.25bn) market opportunity.
The pricing war could present real challenges for solution providers looking for their role and revenue share as new companies enter or expand in the market.
Cisco Systems, this week, announced its entry into the cloud services market, as it plans to invest $1bn over the next two years to develop hosting capabilities for infrastructure and platform services, much to support enterprises and telecommunications companies.
Verizon and AT&T, two traditional telecommunications communications companies, are plying their cloud assets to augment their legacy value proposition. No longer satisfied with being stuck selling data and voice connectivity services, the carriers are rapidly expanding their cloud presence and capabilities through the channel to add new revenue streams.
Cable companies such as TimeWarner and Cablevision are stepping up their channel expansion in the cloud, turning their traditional agents into cloud sales teams. Like telecommunications carriers, the cable companies are looking to leverage their networks and datacentre capacity to capture new revenue through the sale of cloud services.
Perhaps the biggest test of the cloud price war will come with IBM's $1.2bn expansion of its SoftLayer cloud services. IBM bought SoftLayer to increase its service capacity and make it more competitive with Microsoft and Amazon.
With the sale of its Systems x server group to Lenovo, IBM is betting it will make up the lost revenue and gain new business by getting businesses to buy virtual infrastructure rather than on-premises devices. It wants its channel partners, particularly those not in the cloud already, to adopt SoftLayer as their point of entry.
The IBM-SoftLayer build out is an interesting case, as it will reveal whether the cloud has real appeal and ability to sustain revenue. Server sales, particularly commodity x86 devices, fell more than 6 per cent last year, and prices have been commoditised for years. Lenovo is betting it can revive the IBM server business.
If IBM joins the pricing war, it could create an interesting scenario for shaping customer value expectations of cloud services and accelerate the decline of server sales.
Overall, the bad news for solution providers is the cloud pricing war will likely continue, if not escalate. This will increase pressure on prices and native margins of already low-profit cloud services. Making matters worse, vendors will draft solution providers into this cloud pricing war to increase their volumes even when there are no sustainable returns.
As part of our special editorial partnership, CRN is publishing this article from Channelnomics.
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