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The growing strength of the US dollar has big implications for European CIOs' IT budgets, as unfavourable exchange rates with the Euro force technology suppliers to raise their prices to make up the shortfall.
It’s a trend analyst house Gartner has been cautioning IT chiefs to watch for several months now, as it fears US suppliers may resort to “obfuscation techniques” to push product price hikes through without users realising.
Microsoft has already publicly confirmed plans to increase the Eurozone pricing for its Azure public cloud platform from 1 August 2015 to counteract the effect of the strong US dollar against the weakening Euro.
The news came as a surprise to some – given that users are accustomed to cloud providers such as Microsoft, Amazon Web Services (AWS) and Google cutting their prices, rather than increasing them.
However, with scores of US technology suppliers attributing downbeat revenue figures to the strength of the US dollar, it’s thought Google and AWS may come under pressure to follow Microsoft’s lead.
Both Google and AWS blamed exchanged rates, in their most recent set of financial results, for shortfalls in excess of $1bn in their quarterly revenues.
The rising cost of cloud
Whether they will or not is anyone’s guess, says Gartner research director Tiny Haynes. But with Amazon by far and away the cloud market’s biggest player, its response to the Microsoft news will be interesting to watch.
“The price competitiveness has always been downward-facing between these firms, with Microsoft offering to match AWS on price, while there has been something of a price war going on between AWS and Google too,” says Haynes.
Read more about IT spending
- CIOs could end up accidentally overspending on IT in 2015, according to Gartner, as the strengthening US dollar prompts suppliers to covertly hike the cost of products to account for the shortfall in exchange rates.
- The amount of money generated by sales of cloud-related infrastructure grew by more than 25% to nearly $6.3bn in the first quarter of 2015, as more enterprises come round to the idea of moving IT off premise.
“The exchange rates have had a considerable impact on their businesses, so – in that sense – there is a reason and a pressure to increase pricing, and it could happen.”
Owen Rogers, senior analyst at 451 Research for digital economics, isn’t so sure. He thinks Google and AWS may decide to sit tight and take the financial hit, provided they’re making good enough margins on the other services they sell.
“As soon as you start using a virtual machine, for example, you start using other services, such as storage and databases,” he says.
“While the user may only have examined the cost of using virtual machines from a provider, the more of them they use, the more likely they are to use all these other services.
“As long as AWS and Google are making margins on other services, it’s still a profitable way to do business and I think the same would apply despite the currency fluctuations.”
From a competitive standpoint, AWS and Google could benefit from leaving their pricing alone, he adds. “I wouldn’t be surprised to see them keep their prices at current levels and then take the hit in the short term, so they still appear good value for money and can concentrate on upselling other value-add services on top.”
Big opportunities for small providers
With the current economic instability in Greece and the knock-on effect this could have on the rest of the region, Gartner predicts the dollar will maintain its strength through to 2017 at least, which could result in product price hikes of at least 20%.
“We are expecting some price rises and CIO budgets are only increasing – based on our 2015 data – by 3.1% . So there is going to be a bit of gap,” warns Haynes.
This means European CIOs may have to find ways to make their IT budgets stretch a little further, and that may prompt a renewed push to move more of their business to the cloud.
“We certainly saw cloud become the go-to for a number of Mediterranean economies as the start of the downturn, with companies deciding to go down the operational expenditure route rather than the capital expenditure route to procure IT services,” he says.
“When you start to look at the hardware costs, particularly if prices rise, we could see another push towards the cloud.”
If so, whose cloud would users be better off moving to? In light of the Microsoft situation, 451 Research’s Rogers said companies should think about seeking out local, European providers, as this should protect them against the risk of further US/Euro currency fluctuations.
“Local providers should seize on this opportunity to stand up and shout about their local differentiation,” he says.
But simply trying to position themselves as local, cheaper alternatives to Microsoft and the other incumbents is unlikely to prove enough for smaller providers win new business, warns Haynes.
“European cloud buyers don’t tend to go for providers just on price,” he says. “We conducted a survey of CIOs last year and asked them about cloud adoption. Half said they were doing it for business agility benefits – and only 14% because of the price."
This a view shared by Kate Craig-Wood, managing director of UK-based infrastructure-as-a-service (IaaS) provider Memset.
“We have learnt that fighting hard to keep prices similar to or lower than Amazon Web Services doesn’t actually get you a lot more business, suggesting there isn’t much price sensitivity in the market,” she says.
As such, James Walker, president of cloud networking development trade body OpenCloud Connect, claims users are far more interested in hearing about the benefits of using local IT partners – which is what providers should be emphasising.
“They can underline their understanding of the different European country markets and the data privacy, security and compliance requirements in each,” he says.
“Multi-language support can be a differentiator, as well as the capability to be more easily or flexibly integrated into the customer’s environment.”
Supplier lock-in risks
Companies that have already bought into the notion of the Microsoft cloud, for example, may find jumping ship isn't a straightforward process, warns Walker.
“Cloud services are not necessarily directly interchangeable in the services offered – so there may or may not be opportunities for European cloud service providers to step in,” Walker says.
“It’s also a question of supplier lock-in. If a customer has already spent heavily on integration with Microsoft’s cloud or has a large investment in Office or Lync, they may not be able to move.
“For customers still planning their move to cloud, though, there may be an opportunity for European providers to step in to consideration.”
Even then, users should be aware that opting for a local provider doesn’t necessarily mean they will be immune to the effects of currency fluctuations, cautions Craig-Wood.
“While a strengthening dollar can give us a competitive advantage in the short term, it is a double-edged sword for infrastructure and cloud hosting providers, as half of our costs are from server hardware themselves, rather than people, power, etc,” she says.
“Most of the server hardware Memset relies on comes from US providers. Therefore, our costs will inevitably go up in response to a stronger dollar, although to a lesser degree than our US competitors.”
However CIOs choose to respond, it’s worth bearing in mind that, while the currency situation is likely to persist for some time, cloud prices are likely to continue their downward trajectory when stability returns.
Providers will automate more of their technology stacks, and build them using better performing and cheaper hardware, says Rogers.
“In general, the price of cloud is going down, and I would regard this as a fairly temporary situation. Once we see the dollar go back down in value, I see no reason why Microsoft won’t cut their prices too,” he concludes.