Cloud is not a commodity, analysts claim

‘Cloud providers’ so-called “race to the bottom” in cloud pricing is a red herring. Instead, it is a race to the top’

 Cloud is not a commodity, analysts claim

 

The cloud services sector is a long way from being a commodity market, according to new research. Price is barely impacting market share as customers look for value-added services. In short, price doesn’t matter.

The study by 451 Research, which analysed the global availability of cloud services, has unearthed regional gaps in service delivery and identified saturated markets.

451 Research found that cloud providers’ so-called ‘race to the bottom’ in cloud pricing is a red herring. Instead, it is a race to the top, with the supply of higher-value services that is key to long-term, sustainable and profitable growth.

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Virtual machine pricing has dropped 12% on average over the past 18 months, according to the study. The price of storage, NoSQL, load balancing, bandwidth and other cloud services have remained stable and continue to provide margins.

Analysts believe that as the price for cloud compute continues to fall toward zero, the hyperscale vendors will add higher-value cloud services as quickly as they can – aka ‘moving up the stack’ – recognising that the margins currently enjoyed on bulk sales of compute resources are not sustainable.

But the report shows that the lowest-cost service providers have not won greater market share as a result of their pricing strategy. Instead, customers value additional services, local hosting and support and partnering with a familiar brand.

451 Research identified the US as the region where the cheaper price is most likely to drive market share, but still marked its cloud commodity score at only 18%.

By virtue of its size and economies of scale, the US is the cheapest market for cloud. 451 Research said this low cloud commodity score demonstrates there are still opportunities in the US, though service providers should question whether they need their own infrastructure or should partner with a cheaper competitor.

In Europe, price has less impact on market share, with a cloud commodity score of 12% and customers paying on average 3% more than the US.

With a cloud commodity score of just 4%, APAC cloud price changes have minimal impact on market share, reflecting the finding that services in this fractured market cost about 19% more than in the US.

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451 Research said Europe and APAC present more opportunities for service providers than the US because the markets are fractured, with concerns about data protection across borders and a need for local services to meet local performance needs.

“Despite all the noise about cloud becoming a commodity, our research demonstrates a very limited relationship between price and market share,” said Owen Rogers, research director of 451 Research’s digital economics unit.

“Certainly, being cheap doesn’t guarantee more revenue, and being expensive doesn’t guarantee less.

"Cloud is a long way from being a commodity. In fact, the real drama is the race to the top rather than race to the bottom."

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