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Google’s Move Will Spark a New Price War

Google (GOOG) has ramped up the competition in cloud computing through the announcement of the general availability of Compute Engine. Google’s Compute Engine was initially launched about one and a half years ago but it was only available to some of its clients. With this push with cloud computing, Google seems intent on drawing large corporate customers as it aims to broaden its revenue base in the long run. Through its powerful brand, aggressive pricing and attractive features, Google believes that it will be able to emerge as a new major player in this market.

Google, however,h as a long way to go before it becomes a real threat to the total dominance of Amazon (AMZN). The Compute Engine comes with agreement of performance, which guarantees that through this, the high volume workload will continue working 99.95% of the time, which is significantly above what is generally considered as the industry standard. In addition to that, the company has also cut the prices of its most popular Standard Instances, where clients can use Google’s computing power, by 10% in all regions. Moreover, the prices for Persistence Disks service have also been reduced by a massive 60% per gigabyte.

Besides the price cuts, Google has also added some new features to lure customers such as 16 core instances and a faster persistence disks service. The company is now offering access to more complex and larger computing systems. The company also offers other solutions for managing databases. Add Compute Engine to the equation and Google will be able to provide a one-stop solution package to its clients.

Google was a late entrant in this market which has been dominated by companies like Amazon, Microsoft (MSFT) and IBM (IBM). The three are well established players in the business of public cloud computing and have been competing with each other for the control of private and public organizations. Therefore, it has not come as a surprise that the search engine giant is trying to catch up with other companies in this industry through new features and aggressive pricing.

The world’s leading online retailer, Amazon, was the first large organization to introduce public cloud through its service known as Amazon Web Services. The company is now the largest player in this industry. Amazon has literally hundreds of thousands of cloud customers, but most of them are individuals or small business. The company, however, has been able to lure corporate clients as well, such as Netflix (NFLX), which started using Amazon’s cloud in 2008 and by 2012, the leading on-demand Internet streaming website moved its entire operations on Amazon’s cloud.

Microsoft’s cloud network covers nearly 90 regions around the world and has more than 3 million customers. One of its leading corporate clients is 3M (MMM), which uses Microsoft’s Azure. Since Google has only just made its compute engine generally available, it doesn’t have a long list of leading corporate clients. However, some of its current customers are Snapchat, Wix and Evite.
All the players in this industry, including Microsoft, IBM, Salesforce (CRM) and Google, have a long way to go before they catch up with Amazon.

Amazon completely dominates the infrastructure as a service (IaaS) and platform as a service (PaaS) market. According to data provided by Synergy Research Group, Amazon has the industry leadership position in North America, Europe, Middle East and Africa (EMEA) region as well as Latin America and Asia Pacific and China region.

Cloud computing is a booming industry which is will continue to grow at a rapid pace in the coming years. According to the research firm IDC’s estimates, the corporate expenditure on cloud computing will likely cross $100 billion in 2014, which would show a robust 25% growth from 2013 levels. To tap into this growing market, the cloud operators will increase their spending. IBM will start 14 new facilities, with almost 240,000 servers around the world by 2014, which would be a significant increase from its current count of 25 facilities. Microsoft is introducing its cloud OS network, which includes 25 service providers and network integrators located around the world that offer services on Windows Azure.

While the long-term future appears bright, the short term might be a bit challenging. Google’s move to reduce its prices highlights a key point that the companies in this industry are willing to sacrifice their profit margins for greater share of this growing market.

In March 2012, Amazon dropped the prices of its online file storage web service, S3, by 8% to $0.115 for the first gigabyte. Within 48 hours, Google responded with a similar price cut for its storage services. Then, on Nov. 26, 2012, Google announced a 20% price cut for its storage, which, within 48 hours, was matched with a 25% drop by Amazon and was followed by Microsoft’s 28% reduction in prices of Azure cloud storage. The price wars are nothing new in this industry and with Google’s general availability of Compute Engine, coupled with attractive discounts, it has certainly ramped up the competition.

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website


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