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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?

Timing is everything? 

However, I think there's something much odder about Microsoft's decision to increase prices. Raising prices, which is likely to direct potential customers to other providers, is, on the face of it, a poor short-term decision. Since the increase positions Microsoft more higher-priced than the current market leader, it only makes sense if you expected Amazon to follow suit and raise its prices, which, as noted above, is unlikely. 

The decision to raise prices is doubly odd given that this is a nascent market. Customers making choices today are likely to stick with them for years, so surrendering the lifetime value of many customers to avoid a relatively small loss today is perplexing. 

It's also perplexing because Microsoft has worked its guts out to achieve its position as second-largest CSP and the only member of Gartner's IaaS leading quadrant other than AWS. Raising prices is likely to cede revenue to AWS, which is Azure's primary competition. Traditionally, one of the ways a less-established market entrant competes with the dominant market player is to offer lower prices. This move, which positions Azure as more costly than AWS, flies in the face of that approach. 

Finally, I find the decision to raise Azure prices puzzling because it forfeits one of Microsoft's undoubted advantages vis-a-vis Amazon: deeper pockets. Microsoft has virtually unlimited capital resources compared to Amazon, so why would it not take advantage of them? In this scenario, far from raising prices, Microsoft would lower Azure prices to make Amazon absorb lower margins, which would hurt the dominant company in the industry more than Microsoft. That approach is clearly what Google has pursued, and it's surprising that Microsoft hasn't executed the same playbook. 

If I had to guess, I would speculate that the Azure team undertook this price hike as part of the overall Microsoft price increases; packaged software (which also saw price increases) makes up the vast preponderance of Microsoft revenues and, while under no particular competitive pressures, is also not growing very rapidly. So, for the purposes of earnings growth, it is important for Microsoft to adjust European prices, and the Azure group needed to increase its prices in parallel. 

It will be interesting to see how this price increase plays out. But for sure I think it's safe to say that this move by Microsoft should not be viewed as "the end of the beginning" for cloud computing, and the turning point after which cloud prices go up, not down.

 

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