Brexit price increases begin to hit cloud buyers - opportunity for UK providers?

Derek du Preez Profile picture for user ddpreez January 8, 2017
Microsoft Azure announced a 22% price hike for its cloud buyers at the end of last year. Do currency fluctuations create an opportunity for UK providers?

UK flag Brexit stormclouds from EU balloons below © meatbull -
The result of the EU referendum has seen huge fluctuations in the currency exchange markets. Taking politics out of the equation, it can’t be denied that an almost 20% decrease in the value of the pound against the US dollar since the British public voted to leave the European Union, will mean that it will be more expensive for buyers in the UK purchasing products from abroad.

And whilst consumers have been outraged by the price hikes of some of their most beloved supermarket goods (Marmite is going up over 10%!), buyers of cloud services are also likely to see a negative impact.

Given the dominance of cloud providers coming from the US, many of which charge in US$, currency fluctuations should have been something that UK cloud buyers identified as a risk and planned for. The problem is, how many would have planned for a 20%+ increase in the space of just a few months?

Obviously there are buyers that will have paid upfront for a fixed amount of time - and they will be protected until they need to renegotiate - but new buyers, or those on a pay-as-you-go contract will be feeling the effect of the Brexit decision right now.

US cloud providers charging in US$, such as Amazon, immediately find their products more expensive in the UK. However, others, such as Microsoft Azure, that charge in British Pounds have already made significant increases to their prices. It is expected that others will follow suit.

Back in October Microsoft said that it would be raising its cloud prices by 22% to make up for the fluctuations in currency. It said:

Microsoft is announcing British pound changes to harmonise its prices for enterprise software and cloud services within the EU/ European Free Trade Agreement region.

Starting January 1, 2017 British pounds prices for on-premises enterprise software will increase by 13 per cent and most cloud prices in British pounds will increase by 22 per cent to realign close to euro levels.”

Even after this adjustment, customers across the region buying in British pound will still find our cloud offerings highly competitive.

More to come?

So, if January wasn’t bad enough already, cloud buyers now need to be aware that they will be paying significantly more for US-based services. This is particularly painful given that cloud sellers have always praised the downward trajectory of cloud-based services, particularly at the infrastructure and platform layer.

I spoke to Owen Rogers at 451 Research, which has created a useful cloud pricing index, to identify the impact on buyers and to get an idea of whether or not we can expect more price hikes in the market. Rogers said:

It seems reasonable to me that they have to increase prices because of the difference in currency fluctuations.I think because Microsoft is a big player, it’s attracting a lot of attention. I imagine a lot of cloud providers will follow suit, I certainly don’t think Microsoft will be alone in doing this. I’m pro-European, so I think if the UK public voted to leave the European Union, then it’s common sense that prices are going to go up.

I think 22% is significant. Since Brexit happened, actual cloud pricing has gone down around 1% because of price cuts and price erosion. But due to currency fluctuations, for UK consumers it has actually gone up 20%. I don’t think many companies would have planned for a 20% increase in currency and I think that’s where the risk lies. I don’t think you would have expected costs to go up 20% in three months.

However, Rogers also noted that the cost increases forced on US providers of cloud services could also work in favour for UK cloud providers that are protected somewhat by the currency fluctuations. Rogers said:

It is possible that UK providers costs would go up, because they would typically have to import hardware from somewhere. Obviously they’re going to need to pass that on to end users down the line. But I do think there is an opportunity here for UK cloud providers - not just on the cost issue, but also because we are in quite uncertain times at the moment.

No one really knows what’s happening with Europe. The US seems fairly polarised. If I was a CIO and I was worried about my data, I’d choose to host it in the UK. And if I was to make a cost saving as well, then there’s another tick box there for the UK.

British Business

Simon Hansford, CEO UKCloud

One British cloud provider looking to highlight the effect of the US cost increases versus the price reductions of their own services is UKCloud. Today UKCloud has announced its tenth round of price reductions in the past four or so years, across two of its most popular services: Cloud Storage and Enterprise Cloud Compute.

Whilst cloud cost reductions are not typically news worthy in their own right, within the context of the Brexit vote and the price hikes of US providers, British-based buyers may be taking note.

UKCloud’s Cloud Storage now carries a price tag of 1.5p per GB per month, a reduction of 66 percent. The company claims that this is “significantly cheaper than those of the leading US cloud providers”. It also said that large companies running its largest virtual machine sizes will see costs drop from around £1.05 per hour to 60p per hour.

Bill Mew, UKCloud’s Cloud Strategist said that “it’s a trajectory we have been on for a long time, it just so happens that the latest reductions coincide with the 22% price hike by Azure”. He added:

The whole point of cloud is to move from Capex to Opex, and if you are moving to Opex you want a stable Opex you can work to. The reality is that most people are dealing with an Opex that is at risk from currency fluctuations if they’re not going with a UK vendor.

We also spoke to UKCloud CEO Simon Hansford, who said that whilst the company does buy hardware from the US, it has trust in its supply chain to not see prices fluctuate in any significant manner and that cost savings will be passed on to the company’s customers. Hansford said:

We buy and sell in Pounds. Our business is a British business, through and through. We are confident in our supply chain, that our prices are not changing significantly. We buy forward for a significant duration with all the major vendors. Yes, we get price increases and reductions, but if you go back to our core business, we are becoming a larger and larger scale business.

As you get to scale, you are able to pass on cost savings to customers because you are able to run your platform more efficiently, you are able to buy more efficiently, and you are able to reduce man-costs through automation.

Typically we would pass these cost savings on to customers. In four years this is our tenth price reduction. In our belief, cloud pricing should be a one way direction and we don’t foresee that changing. We think it will be quite a shock to customers, that are quite frankly locked into Microsoft.

For people like Microsoft, or Amazon, it’s a currency exchange rate. It’s a product manager sitting in America going ‘our product is out of kilter because of an exchange rate’ - that’s very different to the view we have got.

My take

Given the uncertainty around Brexit and the negotiations that are likely to begin this year, I don’t foresee the £/$ exchange rate stabilising or strengthening anytime soon. This situation is likely to have an impact on US cloud prices for the medium term, at the least. When you combine that with the data sovereignty concerns that coincide with a decision to leave the EU, I wouldn’t be surprised if more and more CIOs begin to consider UK cloud providers going forward.

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