Cloud Costs Drop Faster for Hagglers: 451 Research

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CIOs and IT managers may want to brush up on the art of bargaining.

451 Research’s Cloud Price Index, published today, reveals that on-demand cloud prices have dipped a mere 2.25 percent since October 2014. The average multi-service, on-demand cloud application currently costs $1.68 per hour compared to $1.72 per hour in October.

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Organizations that sit at the bargaining table can score a better deal, however.

According to the firm, businesses that negotiate and commit to cloud agreements can slash costs by 12 percent. In the company’s best-case analysis of a pre-arranged deal, which allows cloud providers to plan capacity and budget their investments, pegs the price at 95 cents per hour, a savings of 44 percent versus on-demand.

The company compiles the report using quotes from companies representing 70 percent of the cloud market. It’s a roster that includes Amazon Web Services (AWS), CenturyLink, Colt, Google, Microsoft, Rackspace, Swisscom, Verizon and Windstream.

451 Research also found that the price of cloud compute has dropped 4 percent in the intervening months and bandwidth now cost 3 percent less. Despite this, cloud providers are raking in revenue and profits due to stable pricing on other services, including platform-as-a-service, management and storage.

And while headline-grabbing price reductions have become commonplace, the economics continue to work squarely in the favor of big cloud services providers, according to 451 Research senior analyst, Dr. Owen Rogers.

“If you believe the hype, public cloud providers are in a cutthroat price war and ‘race to the bottom,’ where margins are being slashed, and profitability is at risk,” said Rogers, in a statement. “The reality is there is no cloud price war.”

As businesses accelerate their cloud migration plans — or skip on-premises deployments altogether — cloud companies are relying on high-margin services to fill their coffers.

“There are battles being fought over certain cloud services, particularly compute, where providers are seeking publicity and market share in return for price cuts. But cloud providers are more than just compute – considering 50% of our typical Web application’s costs relate to cloud databases, it’s easy to see how sales of more value-adding services can offset declining margins on basic services,” observed Rogers.

In short, cloud providers are hip to loss leader pricing strategies. “Cloud has no bottom price. Even if infrastructure is eventually given away for free, as long as the provider sells other services, which offset this loss, then it can still be a profitable business,” stated Rogers.

Pedro Hernandez is a contributing editor at Datamation. Follow him on Twitter @ecoINSITE.