VARs urged to act on "margin-eroding" cloud price cuts
Microsoft, Google and Amazon Web Services have all cut the price of their cloud services, but at what cost to the channel?
VARs need to act fast to counteract the negative impact that the recent run of vendor-led cloud service price cuts could have on their margins, channel onlookers have warned.
In recent weeks, Google, Amazon Web Services (AWS) and Microsoft have all slashed the end user price of several products in their cloud portfolios.
AWS confirmed that it is lowering the price of its Elastic Compute Cloud, Relational Database Service, ElastiCache and Elastic Map Reduce cloud services in a blog post at the start of the month.
At about the same time, search giant Google announced it is dropping the price of its cloud storage service by up to 15 per cent.
Several days later, Microsoft declared that it is cutting the cost of its public storage and compute cloud services, having already lowered the price of its Azure SQL database product the previous month.
The software giant followed this up on 14 March by chopping up to 20 per cent off the cost of several of its enterprise Office 365 pricing plans.
Ian Moyse, sales director of online CRM software vendor Workbooks.com, predicted that cloud prices will continue to fall as the market matures, which could spell trouble for the channel.
"Cloud services should become cheaper as [vendors] gain economies of scale," he told ChannelWeb. "This has a knock-on implication for resellers who may find their annuity revenue stream decreasing in line with the vendor's medium-term reduction.
"The greater challenge will come when a cloud service is more mature. How will a vendor sustain a price reduction that could see them wiping tens of percentage off its own large annuity revenues for little or no immediate gain?"
Meanwhile, Rob Lovell, chief executive of hosted infrastructure vendor ThinkGrid, said reseller margins will feel the brunt of these price cuts.
To counteract this, VARs should concentrate on providing a higher quality of service and bump up their prices accordingly.
"Decisions [like choosing a cloud service provider] shouldn't be based on price alone. Instead, resellers should focus on providing quality services, a range of vendor-agnostic solutions to increase choice and good SLAs, while demonstrating their expertise to deal with any problems that might arise," Lovell told ChannelWeb.
James Monico, a director at Google Apps and AWS reseller Cloudreach, said price cuts are not all bad news for the channel.
"On one side you may see reduced resale revenue, but on the other you will see increased market adoption," he told ChannelWeb.
"When we help to build the business case for a company to adopt Google Apps or Amazon Web Services, we often cite ‘built in upside' as AWS alone have introduced 19 price reductions in their six years of operation. That's what the enterprise loves to hear."
Down and out
Citing last month's Microsoft Azure cloud service outage as an example, Lovell added that such incidents could work in the channel's favour, particularly when VARs focus on the quality of service.
"This failure to get the basics right should deter end users from signing up to these cheaper cloud services," he added.
Greg Rusu, general manager of cloud provider Zunicore, claimed that service quality is already an issue for Amazon users.
"The Amazon customers we've spoken to consistently point to them as being difficult to use, not performing well and having a high cost of bandwidth between virtual servers," he said.
"On top of that, they have reported Amazon's lack of capability to integrate with dedicated hardware, its limited operating system support and, perhaps more importantly, the fact that they are locked into a deployment because there is no ease of migration [away] from AWS."
ChannelWeb was awaiting a response from Amazon to Rusu's claims as this article went to press.
However, Clive Longbottom, service director at analyst Quocirca, said successive cost cutting could eventually put firms off entering the cloud market.
"The cost to newcomers [could] become problematic [as the] return on investment needed to put in place a cloud platform may be stretched beyond what a company can afford and investors may no longer be interested," said Longbottom.
This would be a "worrying" development, he claimed, which is why latecomers to the cloud will need to focus on being better than the competition, rather than cheaper.
"[They need to think about providing] a range of value-add offerings that build upon a commodity base and provide greater business support, rather than just technology," he said.
"BPO [business process outsourcing] is an obvious target, as is cloud aggregation. This is where the reseller has to look to because just reselling commodity at ever shrinking margins is not a particularly strong business model."