Cloud computing (specifically IaaS) is a commodity service and the winning provider is going to be the one that scales the quickest and can sell the cheapest service to end users.
That’s often the perception of the Infrastructure-as-a-Service market, with Amazon Web Services, Microsoft and Google all publicly talking about how they’re slashing prices for their commodity cloud products.
However, this is a “red herring” according to data released today by 451 Research, which claims that customers’ sensitivity to price is actually incredibly low across all markets and that end-users are actually more interested in the ‘value add’ that cloud service providers can offer.
In other words, it’s not all about price. Which is reassuring. Customers are considering what outcome they get for their money, not just about the cheapest kit. This is even more true for customers operating out of Europe, where data protection priorities further reduce the sensitivity to price.
Author of the report and research director of 451’s Digital Economics Unit, Dr Owen Rogers, said to me that he wasn’t surprised about the results and that they supported his instinct that customers would be looking for more than a bargain. Rogers said:
For me it stood out because we hear so much about the cloud price war, with Microsoft and Google constantly saying they’re going to price the same as AWS. For me it was validation of what we’ve always really suspected, in that end users aren’t necessarily after the cheapest cloud service. They’re after the cloud service that matches their needs.
And although they obviously want the cheapest price, they’re not necessarily looking to take the cheapest price all the time to sacrifice some of that value that they’re getting.
451 Research has found that virtual machine pricing has dropped 12% on average over the past 18 months, while the price of storage, NoSQL, load balancing, bandwidth and other cloud services have remained stable and continue to provide margins.
Analysts at 451 believe that as the price for cloud compute continues to fall toward zero, the hyper scale vendors will add higher-value cloud service as quickly as they can - moving up the stack - recognising that the margins they currently get from bulk sales of compute resources are not sustainable.
Dr Rogers said that moving up the stack makes sense and that wrap around support services will continue to be a big attraction for customers. He said:
What we generally find is that virtual machines and storage, they’re kind of the basics that everybody is expected to have. Once those customers are using those services, they’re more likely to stick to that one provider when they want to use database, for example. NoSQL we hear of more and more developers using. But I would take databases in general as a really simple value add service that cloud providers should look to have.
I think support and managed services, they’re the big, big value add. I think they’re a pretty big deal. That is the opportunity for service providers that can’t reach the height of scale.
451’s report looks at how cloud customers’ sensitivity to price varies by region - looking at the US, Europe and Asia-Pacific. Analysts correlated global pricing for the CPI small basket of goods against market share data from 451 Research’s Market, Monitor & Forecast data. The resulting Cloud Commodity Score (CCS) measures price sensitivity; the higher the CCS, the the more likely it is that price is having an impact on market share.
The CCS research found that US is the region where a cheaper price is most likely to equate to a higher portion of market share. However, even in the US the CCS score only stood at 18%.
451 said that this low score demonstrates that there are still opportunities in the US, but believes that service providers need to find the “X factor” and should question whether they need their own infrastructure or should partner with a cheaper competitor.
Europe has less sensitivity to price, with a CCS score of 12% and customers paying on average 3% more than the US.
In APAC the CCS score stands at 4%, meaning cloud price changes have minimal impact on market share, with buyers in the region paying on average 19% more than in the United States. This is largely because of the fragmented nature of the market.
With the differences in price sensitivity across the regions, despite all being relatively low, does this mean that cloud providers should have a different go to market strategy depending on where they are selling? Dr Rogers believes that data protection and in-country concerns will continue to play a role in European customers’ purchasing decisions. He said:
Generally, in Europe, we see the market is far more fragmented. That’s because of data protection concerns. End users in European countries, generally, are more comfortable using a national provider. Just so they don’t have to deal with all this data protection complexity.
Whereas in the US there is a lot less of that complexity, because an end user in New York could potentially buy a service in California with a lot less bureaucracy than an end user in France that wants to buy a cloud service in Germany, for example.
So in the European market, I think the market is less price sensitive because end-users in Europe are willing to pay more to have data protected in country.
And Dr Rogers believes that this opens up an opportunity for IT or telco companies that already operate in Europe - one that may be being missed. He thinks that they should be considering how they could compete with the US-based hyperscalers. Rogers said:
I do think that there are opportunities for companies that already have national strongholds to develop their cloud services to take on the hyperscalers. So, for example, if you’re a Belgian telco, or a Belgian IT provider, for me I think you already there have the incumbent user base.
You already have the national credentials. If end users in that country want to take on cloud services, you’d be the natural company to which they’d go to. I don’t think we will necessarily see new entrants, but we might see European companies who haven’t traditionally gone into cloud, start to go into cloud to take on their national opportunity.
To me it is unsurprising that customers are thinking beyond the price point for cloud computing. Good buyers will be thinking about what outcomes, capabilities and service cloud can provide, and for them it will be the cloud provider that can support these with the greatest value (and at a good price point) that wins out. So whilst economies of scale is important, it’s not the be all and end all for buyers. They want the ‘right’ bargain, not just any bargain.