(Bloomberg) -- For years, getting into the business of renting out extra computing power through the cloud has been a bit like getting into the business of nuclear power. First, you have to spend a few hundred million dollars on ginormous hardware and the pricey software to run it. Next, you have to hire a team of Ph.D.s to make sure the equipment always runs pretty much perfectly, because one screw-up means a customer—probably a big corporate IT department—leaves forever.
That formula is changing as cloud startups such as DigitalOcean and Backblaze begin to compete for customers with the likes of Amazon.com, Microsoft, and Google. The startups have managed to underbid the giants in certain markets by keeping expenses relatively low, either by writing their own versions of the software needed to run a cloud or by handcrafting the hardware needed to house one. “All the tools we’re using really pay dividends,” says DigitalOcean Chief Executive Officer Ben Uretsky. “I think that gives us a leg up.”
Uretsky’s New York-based company sells its cloud services predominantly to software developers—whose priority is cheap storage and equipment they can customize. DigitalOcean writes its own software, and it’s also been a leading buyer of custom data-center hardware, which Chief Operating Officer Karl Alomar says has helped it win sizable volume discounts from suppliers such as Dell and Lenovo. Four-year-old DigitalOcean now has more host computers in its cloud (almost 200,000) than any other company but Amazon (which has about twice that), says researcher Netcraft.
DigitalOcean is managing more than 100 million gigabytes of data, about the size of Facebook’s video and photo library when it went public in 2012. DigitalOcean rents out its computers for $10 per month or a penny and a half an hour, a price comparable to or below those at Amazon, Google, and Microsoft, according to researcher Scalyr.
Backblaze, which for most of its eight years has sold only data-backup plans, said on Sept. 23 that it’s pushing into cloud storage at half a penny per gigabyte per month, 30 percent lower than Amazon’s cheapest service. CEO Gleb Budman says he’s gotten there by focusing on the hardware side—and using a certain amount of mad science.
His team’s first effort at a homemade cloud server, in 2008, was just a bunch of USB thumb drives connected to one another, Budman recalls with a chuckle. The breakthrough came later that year, when his team linked nine storage drives to form a motherboard on a wooden server rack. “We took it to the data center and racked it, ignoring the sign that said don’t bring flammables in,” he says. Backblaze’s rig, called the Storage Pod, keeps prices down by sticking to storage, Budman says—180,000 gigabytes of capacity but a low-end processor and a power button that costs $10 instead of one that costs $25. Backblaze’s cloud manages about 150 million gigabytes of data.
The two startups’ financing strategies differ dramatically. DigitalOcean has raised almost $200 million in venture funding, most recently $83 million in July from investors including Access Industries and Andreessen Horowitz. (Bloomberg LP, the owner of Bloomberg Businessweek, is an investor in Andreessen Horowitz.) DigitalOcean wouldn’t discuss its sales, but a person familiar with its finances says it’s on track to reach about $100 million in recurring annual revenue by yearend. Budman says Backblaze has raised $5.3 million and doesn’t need further funding because it’s profitable, with sales of more than $10 million in 2014.
The trade-off for both companies’ cheaper clouds is that they lack some of the more advanced features bigger rivals offer, such as sophisticated database and machine-learning services. That makes it tougher to peel off Fortune 500 types from the Amazons of the world, but, as long as the startups sell to individual software developers, it may not be a handicap, says Lydia Leong, an analyst for Gartner. For developers, she says, a tight focus on processing or storage reduces the number of potential bugs.
Given their size, both companies acknowledge they’re not prepared to match bigger providers’ features or fight a broader price war. For now, Budman is looking to sign up developers as customers for Backblaze’s new storage service. He says he topped 5,000 on the first day. As for DigitalOcean: “We’re not trying to have the breadth of Amazon,” says platform engineering manager Sam Kottler. “That’s a fruitless task if you’re not Amazon.”
The bottom line: Cloud startups are selling computing power and storage for prices at or below Amazon’s and Google’s.
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