Amazon (AMZN, Financial) Web Services and Microsoft (MSFT, Financial) are locked in a fierce battle to stay on top of the cloud industry, something from which the industry as well as its customers are enjoying huge benefits. The competition is also affecting the growth of new players making it even more harder for them to play catch-up with these two companies.
The pricing wars
One of the many battlegrounds in cloud infrastructure is pricing. Amazon regularly announces its price reductions on its website and, according to the company, it has reduced its EC2 on-demand reserved instance pricing 53 times since launching 10 years ago. Naturally, when one company – especially the market leader – keeps dragging prices downward, other companies are forced to follow suit. And we can already see Alphabet’s (GOOG, Financial)(GOOGL, Financial) Google, which recently jumped into the cloud race, factor that into its pricing philosophy:
“Public Cloud allows developers to build robust, scalable applications. We want to make sure that this service is affordable and that we continue to add value to your applications and business as technology improves and gets cheaper. That’s why we are committed to offering innovative pricing mechanisms like Moore’s Law-based pricing, sustained-use discounts and subhour billing on top of our already low on-demand prices.” – Google Cloud Blog
On the data center front
Since Amazon, Microsoft and IBM (IBM, Financial) were early entrants to the cloud game, they already have solid data center footprints around the globe while Google and Oracle (ORCL, Financial) will have to build theirs to match that scale. Google announced early this year that the company will add 12 more regions to Google Cloud Platform before the end of 2017, and Oracle added four data centers to its list this year.
The fact that they are relatively late to the race means Google and Oracle will have to keep investing heavily in developing their data centers and services to match the leaders of the segment while also keeping their prices in line with those of AWS and Microsoft. AWS runs with operating margins in excess of 25% so it clearly has enough bandwidth to keep pushing prices lower. But what makes it even harder for the newer players to gain traction is Amazon’s unquenchable thirst for adding more and more services to its cloud stack.
During an interview with Seattle Times, Amazon Web Services CEO Andy Jassy said this:
“There is so much that we’re doing simultaneously. We’re going to launch 1,000 significant services or features this year.”
That’s a pace that everybody will have to try and match, and that’s only going to make things even more difficult for Google and Oracle to catch up to the leaders. Both these companies have their own strengths, such as Google’s experience in managing its own humongous infrastructure and Oracle’s expertise in databases. That, along with their deep pockets, will help keep them in the game for a long time – time that they desperately need to scale up and fight on level ground against the top competitors.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
Start a free seven-day trial of Premium Membership to GuruFocus.
