In recent weeks Amazon, Google, and Microsoft have all announced another round of reductions in pricing for various facets of their Cloud offerings. Some pundits and media have highlighted the collective announcements as a “price war”. In a recently published Strategic Perspective available to our premium subscription research clients, we look at the underlying implications of price reductions, and we offer projections of how the Cloud market is beginning to change.

Saugatuck cautions that the recent price reductions are indicators of:

Underlying Realities of Cloud Charges. Saugatuck estimates that at least 50 percent of workloads on Public Cloud infrastructures (IaaS) are “set it and forget it” and are incurring charges for resources that are not actually consumed. Thus, Cloud providers are reaping essentially windfall profits.

Potential Alternative Revenue Sources. Some Cloud providers garner substantial revenue from other businesses such as advertising, market analysis, etc. These other businesses may include analysis of selected attributes of their Cloud customers. Thus, the infrastructure business is effectively subsidizing the analysis business of the Cloud provider.

Impending Changes in the Cloud Market. Saugatuck projects the relative priorities of criteria that customers use when selecting a Cloud offering will evolve through three phases:

  • Phase 1: Early Infrastructure Adoption.
  • Phase 2: Infrastructure Optimization.
  • Phase 3: Support and Delivery Services.

Saugatuck views the recent price reductions as the latest salvo in a price war. However, ongoing success of any Cloud offering will not be governed by a “race to the bottom” in pricing. Rather, the winners of the contest for market share will be those providers that offer competitive infrastructure pricing and high-value services.
Note: Ongoing Saugatuck subscription clients can access this premium research piece (1355MKT) by clicking here, and inputting your ID and password.

This blog was originally published on Saugatuck's Lens360 blog on April 14, 2014. Published with permission.