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Are cloud price hikes a harbinger of the future?

Bernard Golden | July 20, 2015
Microsoft and others seem to be raising the prices of their cloud computing services, at least in certain regions (like Europe). Is this a foreshadowing of things to come for everyone?

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Last week, blogger Aidan Finn posted an excerpt from a Microsoft email announcing 13 percent price hikes in the European region. Reaction from the trade press was immediate, predicting that this action presaged ongoing price hikes.

Barb Darrow of Fortune, in her piece titled "Surprise! The cost of cloud is about to rise" said "Companies spoiled by round after round of price cuts on cloud computing services over the past year or so had better gird themselves for change." David Linthicum, SVP at Cloud Technology Partners, in his blog titled "The era of ever-cheaper cloud services is over" went on to say:

I suspect we'll see some more price increases in 2015 and 2016, for the simple fact that cloud providers are under pressure to make actual money, not simply gain market share. The margins are likely razor thin, so price hikes are the only way to increase cash flow now that the demand is on a path of steady growth. As cloud providers lock in customers, they are bound to raise prices, much like large enterprise software providers have done for enterprise licenses.

On the other hand, in a research piece, 451 analyst Owen Rogers, who focuses on cloud pricing and economics, proffered a different reason: exchange rates. His analysis says:

We believe this price increase is a 'blip' caused by currency fluctuations, and cloud services (particularly IaaS) will continue to decline in price overall over the next few years. We anticipate many cloud providers will absorb currency fluctuations in their pricing, such that gross margins on some services are temporarily reduced but a competitive price is maintained.

And Finn himself put forward currency exchange rates as the reason for the price change:

Microsoft announced, by email, tonight that pricing for Azure in the Euro Zone will increase by 13 percent. This is not surprising; The Euro has tanked thanks to Greece over the last 6 months.

I agree with both Rogers and Finn that the root cause for the Microsoft price increase is the change over time in the Euro/Dollar exchange rate, as seen in this chart from oanda.com:

As can be readily seen, the Euro has dropped precipitously over the past year, making it likely that Microsoft's Azure offering has run into stiff headwinds in terms of its cloud revenues and how they translate into its US results, which probably accounts for its pricing change. 

A sign of things to come? 

The question is, of course, does Microsoft's action foreshadow a general reversal of the historic downward trend of cloud prices across the industry? Should current and potential users reexamine their assumptions regarding likely costs and the associated application deployment decisions? Moreover, the crucial question, as noted by Darrow, is whether Microsoft's move will be matched by other providers, especially AWS, the dominant cloud service provider. 

 

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