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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?

From my perspective, Microsoft's action is not the initial move in a shift toward higher cloud prices, for the following reasons: 

  • This is an emerging market, with users still making initial choices in what promises to be long-term vendor choices. Raising prices in a nascent market is likely to put off potential customers, especially ones conditioned to ever-lower prices as a core feature of the market. So Microsoft's move is unlikely to foreshadow a general trend.
  • Amazon is unlikely to increase its prices. Amazon takes a long view regarding its business, and uses ever-lower prices as a core part of its strategy. Raising prices in response to disadvantageous exchange rates does not align with that strategy, so Amazon probably won't be hiking its prices. In any case, as I discussed when I analyzed AWS financials after Amazon broke them out in April, AWS has high enough margins that it can absorb a currency exchange hit.
  • To say that cloud prices have reached an irreducible minimum and that CSPs will now, inevitably, turn toward raising prices, is not accurate. First, assuming Moore's Law continues at least into the mid-term (35 years), the input costs for basic cloud computing will continue to drop. While some providers might think this provides the opportunity increased margins or, for those who are suffering financially, to raise prices sufficiently to move toward profitability, there are some CSPs who eschew this approach and reduce prices to align with internal cost reductions (e.g., AWS and Google). David Mytton, a frequent commentator on cloud pricing, noted in his blog that core cloud services like compute, storage and network are commodity offerings and tend to be highly competitive and track closely to cost inputs -- and therefore it's unlikely that Microsoft's move presages a general trend. David's post is highly perspicacious and should be read on this topic. 

Finn notes in his piece that Microsoft's move is quizzical. To a certain extent, the exchange rate change shouldn't have much of an effect, according to Finn, given that Azure receives revenues and incurs costs in Euros within Europe. So the two should cancel one another out, with only the margin remitted to Microsoft in the U.S. subject to exchange rate issues. 

I'm not so sure about that, given that a large part of the revenue is tied to capital investment, which incurred the cost in the past at the higher Euro exchange rate; today's revenue has to be applied against those costs, which, when the revenue is worth much less means the greater part of the revenue needs to have the exchange rate applied bottom line, the exchange rate change affects more than just the difference between cost and European revenue. 

 

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