Traditionally, hosting and managed services has been sold on fixed price contracts with steep discounts for those organizations who committed for multiple years. This is how most managed services providers have made their profits – they make them on the back end when they have optimized the service model (e.g. you aren’t calling them everyday with bugs, change requests and outage issues). In addition, if you are running in a virtual environment, this allows the hosting provider to upgrade hardware with cheaper, more powerful boxes while you are still effectively paying for the expensive hardware you originally bought at the point of purchase.
In a cloud based model, that pricing model is constantly changing. You pay only for what you use and for every new CPU or GB that you need, you’ll pay the latest prices unless you have committed to a multi-year pricing agreement.
Right now, the direction for cloud pricing in the industry is clearly in one direction – DOWN.
Here are some recent examples:
- Google has just announced a 60% cut in its block-storage pricing.
- Amazon dropped its price for EC2 dedicated instances by up to 80%
- Microsoft commits to matching Amazon price cuts
Why is this happening? There are a couple key reasons:
- Massive competition between the two dominant cloud rivals – Amazon and Microsoft – and up and coming cloud players (Google, Rackspace, Oracle, IBM, etc.)
- Optimization of the hardware – e.g. the cost of storage, CPUs, RAM, etc. continues to decrease (as it has for 30 years now)
- Optimization of the data centers – lower cost of power, increased density, increased scalability, etc.
Will this continue? Simply understanding industry trends over the past twenty years, I think the easy answer is yes. If you look at the cloud industry, its still in its infancy and as it expands, technology becomes cheaper and data centers grow larger the prices will drop significantly.
How can you benefit from a market where prices are continually dropping?
- Only buy what you need today: buying extra storage space, CPUs, etc. especially in a dynamically scaled environment will cost more today than buying 6-12 months from now.
- Be careful about multi-year commitments: those 5-10% reductions in price for signing multi-year commitments might sound attractive but if the market is driving prices down by 20-30% then you’ll end up losing.
- Avoid vendor lock-in: there will be multiple vendors competing for your business in the years to come. If Amazon or Microsoft or Google offered you a 20-30% discount to switch could your team migrate all your VMs, databases, etc. easily to another option?
- Separate services and hosting: service costs won’t be as elastic as hosting and bundling your managed services and hosting costs may feel attractive up front but may lock in your faster price dropping hosting costs at a higher rate. Even if you have a single managed services provider that includes both hosting and services, ensure that you can de-bundle the two if hosting prices drop significantly in the coming years.
The strategy is a simple one – use cloud services as dynamically as possible and don’t let fixed price contracts, commitments, and multi-year pricing offers act as to deter you from the long term attraction of a cloud based model.