Cloud economics will challenge every IT supplier

The over-used phrase “price war” has rarely had a lot of relevance in the corporate IT market.

At best, we may have seen PC or server makers cutting prices by a few percentage points, or more typically bundling in new features to keep prices steady.

But now Google and Amazon are engaging in a genuine price war that not only benefits IT leaders but demonstrates the way that computing power at massive scale – known commonly as the cloud – takes IT into the realm of retail economics and commodity pricing.

First, Google announced a raft of new services for its cloud platform, and cut its prices by between 32% and 85% in a direct challenge to Amazon Web Services (AWS).

Amazon responded days later with what it claims is its 42nd AWS price cut, reducing costs by up to 40% to stay mostly on a par with Google.

We still wait to see how Microsoft – which has promised to compete on price in the cloud market – will respond for its Azure service.

This is the economics of enormous scale. The more companies sign up to Google or Amazon’s cloud services, the greater the scale of operation, and the more prices will tumble. As long as the cloud providers continue to expand their datacentres to stay ahead of growing demand, the economics dictate that the unit price of processing power or storage reduces with greater size.

This, more than any technical capability that the cloud offers, is the reason why this will be such a transformative technology for corporate IT in the years to come.

It will also have a knock-on effect in other areas. If, for example, you can run a database on a commodity cloud service, can you really justify the price differential between Oracle or SQL Server licences and an open source equivalent?

Even if the open source option is less functional, you will want to keep the costly per-user or per-processor licences of the proprietary software reserved only for the uses that can justify that extra cost. The same logic will increasingly apply across many areas of IT products.

The potential benefits for IT leaders are enormous. For IT suppliers, there is no denying the future. CIOs would be wise to ask their key suppliers how they plan to respond.