Compute price bottom may be in sight

RightScale research indicates that the price of compute services is dropping slower than other infrastructure services

Price reductions on infrastructure services seem to happen weekly. But it turns out that the cost for compute -- a core infrastructure service -- isn't dropping as rapidly as other infrastructure services. That could mean that margins are slim enough in compute that the price bottom isn't far away.

RightScale sat down and tallied up all the cloud price reductions on infrastructure services from Amazon Web Services, Azure, Google and Rackspace since January 2012.

Curiously, 23.3 percent of price cuts over that time period were for compute services, even though compute makes up two-thirds of cloud costs. The average amount of compute cuts was 20 percent, less than the reductions for other services that aren’t as widely used. RightScale determined cloud costs by looking at data from its PlanForCloud service.

rightscale 2.jpgSource: RightScale
Bandwidth price cuts were, by far, larger than for other services.

For instance, the average reduction on bandwidth was nearly 50 percent and for database more than 30 percent.

There are a couple reasons that compute pricing is heading down slowly, relative to the volume of usage, according to Kim Weins, vice president of marketing at RightScale. It’s possible that providers are trying to protect profits.

“But it could be that margins are already thin on the compute portion so the room to decrease those costs is not as great,” she said. AWS and other providers may have already squeezed out all the efficiencies they can from scale and dropping hardware prices and passed those savings onto customers.

If that’s the case, compute pricing might drop at a much slower rate going forward, at least unless there are breakthroughs that will help decrease costs for providers.

It's a similar story with storage, where the average price reduction was less than 20 percent. Storage has been a tough nut to crack in the infrastructure services market since costs are so dependent on hardware.

rightscale_0.jpgSource: RightScale
Compute had 23 percent of price reductions but makes up two-thirds of usage.

By comparison, some of the other services may have plenty of more room for cuts. RightScale found that 26.7 percent of price reductions fell in the “other” category. “If you look at some of the ‘other’ services like databases and caching and IP addresses, it’s very possible those are a bit more value based pricing versus cost based pricing,” she said.

For instance, since a MySQL database is built around open source software, the cost per customer for a service provider may not be very much. If a service provider can gain efficiencies through automation and improved management, they can further reduce their costs, again passing savings onto users.

RightScale also found that, as expected, AWS cut prices more frequently than competitors. AWS announced 19 price cuts since January 2012 while none of the other providers cut costs more than four times each.

However, the difference may not be as dramatic as it seems. Many of the AWS cuts were for services like messaging, search, and caching, that the other providers may not offer. Also, some of the providers, like Google, didn’t start offering the services until the middle of last year. In the eight months since it launched, Google has reduced pricing three times on its infrastructure service.

rightscale 3.jpgSource: RightScale
AWS cuts appear to have picked up, after more competition entered the market.

While AWS has been rapidly cutting prices since the beginning, it’s doing so at an even faster clip since the competition launched, indicating it has its eye on them. AWS has dropped prices in six of the nine months since both Google and Azure infrastructure services have been available. That period includes the so-called storage wars of November 2012 when storage prices on three public cloud providers – Google, AWS, and Azure – dropped 20 percent to 30 percent in the span of just 11 days, RightScale found.

In the two months prior to the launch of Google and Azure infrastructure services, AWS made no price cuts.

Read more of Nancy Gohring's "To the Cloud" blog and follow the latest IT news at ITworld. Follow Nancy on Twitter at @ngohring. For the latest IT news, analysis and how-tos, follow ITworld on Twitter and Facebook.

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