The economics of the cloud in action

Compare and contrast the following excerpts from Computer Weekly news stories in the past few days:

27 November: Google is expanding its infrastructure-as-a-service cloud computing platform into Europe and cutting the price of its cloud-based storage by 20%. From December 1 the price for up to 1TB of storage will be reduced by $0.025 per month to $0.095. This is $0.025 cheaper than Amazon’s equivalent S3 storage cloud.

29 November: In response to Google’s announcement, Amazon is cutting S3 pricing by about 25% across the board, effective from 1 December. Customers will be able to store data in the cloud for about $0.09 per gigabyte.

28 November: Windows users can expect a 15% increase in the cost of licensing key Microsoft products as the software giant raises its prices. From December 1, Microsoft will increase the price of per-user licensing of several products including Exchange, Lync, Windows Server and Terminal Services.

Here we have the co-existence of two eras of information technology – the question it poses is how long can that co-existence continue?

The commoditisation of computing power and storage through the cloud is spreading at pace, bringing increased competition, driving down prices and improving service levels. It’s happening now – Amazon says that at the latest count S3 stores 1.3 trillion objects and receives 800,000 requests per second. That’s not a niche or specialist business, it’s mainstream computing.

Microsoft, meanwhile, unilaterally puts up prices, because it can. Earlier this year, the software giant increased its volume licensing prices to corporate customers by up to 25%. Why? Because it can. But the firm also cut the costs of its cloud-based Azure and Office 365 products. Why? Because it had to. That’s what competition and commoditisation forced Microsoft to do.

It won’t take long for IT leaders to notice the difference in competitive behaviour of old era suppliers such as Microsoft, and compare with their new era suppliers such as Amazon and Google. It might take them a lot longer to ditch the old and switch to the new, but with economics like those described above, it is inevitable.

Microsoft isn’t the only one – SAP and Oracle have both come under fire from customers over their pricing policies.

The difference is that as these established suppliers grow, so they put their prices up further or make their terms more complex. In the cloud, the more you grow, the greater the economies of scale, and the more you can pass those on to customers in the form of lower unit prices.

Forget the issues of functionality, of branding or legacy that protect the user base of large suppliers. They are, ultimately, transient. It is simple economics that demonstrates the scale of the changes that the cloud is going to bring, at increasing pace, to IT spending priorities in the next five years.

Enhanced by Zemanta