451 Research shows cloud costs falling slowly, but unearths huge savings for enterprises willing to commit

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On-demand cloud pricing has fallen just 2.25% since October 2014, while the cost for customers that commit has dropped 12%.

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“If you believe the hype, public cloud providers are in a cutthroat price war and ‘race to the bottom,’ where margins are being slashed, and profitability is at risk,” said Dr. Owen Rogers, senior analyst at 451 Research's Digital Economics unit

The latest 451 Research Cloud Price Index™ finds that while on-demand pricing has fallen only slightly at 2.25% since October 2014, it is nowhere near matching the 12% reduction achieved by those enterprises that negotiate and commit.

Using 451 Research’s cloud pricing model, representing a typical multi-service on-demand application, the cost is now $1.68 per hour; in October 2014, the cost for the equivalent basket of cloud services was $1.72.

Revealing the extent to which service providers encourage commitment to help them plan capacity and ensure capital for infrastructure investment, 451 Research’s best-case price indicator is only $0.95 - a huge 44% savings compared to on-demand. The best-case price measures the same application used the same way as on-demand pricing, but takes into consideration negotiation, subscriptions, reserved instances, term commitments, and sustained-use discounts.

Although the Cloud Price Index shows compute pricing has fallen by 4% and bandwidth has come down 3%, service providers are enjoying increased revenue and profits from other services such as management, PaaS, data and storage pricing, which have remained static over the same period.

“If you believe the hype, public cloud providers are in a cutthroat price war and ‘race to the bottom,’ where margins are being slashed, and profitability is at risk,” said Dr. Owen Rogers, senior analyst at 451 Research's Digital Economics unit.

“The reality is there is no cloud price war. There are battles being fought over certain cloud services, particularly compute, where providers are seeking publicity and market share in return for price cuts. But cloud providers are more than just compute – considering 50% of our typical Web application’s costs relate to cloud databases, it’s easy to see how sales of more value-adding services can offset declining margins on basic services,” commented Rogers.

“Cloud has no bottom price,” Rogers adds. “Even if infrastructure is eventually given away for free, as long as the provider sells other services, which offset this loss, then it can still be a profitable business.”

The Cloud Price Index™ from 451 Research
451 Research created the Cloud Price Index to understand the real-world cost of cloud over time. Like a consumer price index, 451 Research's Cloud Price Index is made up of a basket of goods, but in this case, it is a specification of the services required to operate a typical Web server application. The Cloud Price Index is the specification of a multi-service three-tier cloud application consisting of Linux VMs, object storage, block storage, relational databases, NoSQL databases, load balancing, access control lists and snapshot backup in a resilient architecture.

451 Research collects quotes from providers including AWS, CenturyLink, Colt, Google, Microsoft, Rackspace, Swisscom, Verizon and Windstream, representing 70% of today’s cloud market. By considering not just compute and storage in our basket, 451 analysts can understand pricing when related to end users' real expenses, as well as service providers' overall strategies. And we can analyze pricing now only in terms of on-demand consumption, but also when related to enterprise commitments and negotiations.

About 451 Research
451 Research is a preeminent information technology research and advisory company. With a core focus on technology innovation and market disruption, we provide essential insight for leaders of the digital economy. More than 100 analysts and consultants deliver that insight via syndicated research, quarterly market surveys of over 3,000 industry professionals, advisory services and live events to more than 1,000 client organizations in North America, Europe and around the world. Founded in 2000 and headquartered in New York, 451 Research is a division of The 451 Group. Learn more.

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Michael Essery
451 Research
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