Cloud-pricing insights

Transcription

1 Paul Burns a cloud report

2 06/30/2014 TABLE OF CONTENTS 1. EXECUTIVE SUMMARY 2. CURRENT IAAS PRICING MODELS FALL SHORT 3. IAAS PRICING DYNAMICS AND DEVELOPMENTS 4. RECOMMENDATIONS 5. CONCLUSION 6. ABOUT PAUL BURNS 7. ABOUT GIGAOM RESEARCH 8. COPYRIGHT 2

3 Cloud computing has had a significant impact on the traditional hosting and managed service provider (MSP) industries. Many providers that only offered dedicated infrastructure are now clambering to offer more-flexible, elastic infrastructure in an attempt to keep up with the shift to the cloud. Some have simply added virtual private servers (VPS), while others have built elastic Infrastructure-as-a-Service (IaaS) offerings using commercial or open-source cloud-management platforms. The latter services often include programmatic APIs, object storage services, and other capabilities offered by the big three IaaS players: Amazon Web Services (AWS), Microsoft, and Google. One of the major challenges for providers building their own IaaS offerings is driven by the ongoing price war taking place among established IaaS players. Service providers building these modern infrastructures must make significant capital expenditures while contending with continually dropping prices. Meanwhile the most successful IaaS providers are already accumulating margins at scale and using them to fund ongoing growth. These dynamics make it difficult for emerging IaaS providers to build and price services profitably. At the same time, service providers are facing increased competition from telcos, valueadded resellers, copier companies, and even systems integrators that are now offering managed services. This has led to declining profitability, increased difficulty acquiring new customers, and high customer turnover since customers of MSPs increasingly focus on lower price and not greater value. It is imperative that emerging IaaS providers and MSPs gain deep insights into existing pricing models so they can attain low cost structures, increase profitability, boost competitiveness, and improve customer retention. Additionally, by understanding the advantages, disadvantages, and implications of these pricing models, service providers can develop and apply their own pricing innovations to make their offerings even more successful. Feature image courtesy Flickr user Trenten Kelley 3

4 Current IaaS pricing models fall short AWS has largely set the standard for conventional IaaS pricing models, with the majority of IaaS providers following a similar approach. For example, most providers offer payper-use pricing charging for the time customers retain an instance and do not require long-term commitments. Hourly pricing is most common, although some providers charge by the minute or on a monthly basis. Price varies among compute instances based on the amount of included CPU, memory, and storage consumed. AWS has also pioneered several meta-pricing models that are used throughout the industry. These models incorporate fundamentals such as instance size and duration of use, and they introduce variables such as the length of customer commitment and demand-based prices. Consider these meta-pricing models, keeping in mind that their names vary from one provider to another: On demand. This usually reflects standard list pricing for compute instances. It doesn t provide the lowest price, but customers can access this type of instance any time, without advanced planning. Reserved. This pricing model has customers commit to an extended-usage time frame and then receive discounts based on the length of their reservation. Auction. This model lets customers place a bid, or price, they are willing to pay for an instance. Prices vary based on current supply and demand. With AWS, once bids drop to the customer s specified price, they get access to the instance until another customer places a higher bid. On the surface, this variety seems to indicate flexibility and the ability for customers to select the optimal pricing model for any need. Unfortunately, it also creates a number of customer pain points. It is difficult to know which meta model to use. Reserved instances may save money, but they also require an up-front financial commitment. Auction instances can save money, but applications may be interrupted when higher bids are made. 4

5 It is extremely difficult to compare cloud prices. There is no industry-standard unit of measurement for comparing prices among clouds. Customers must develop and run their own price and performance benchmarks or pay a third party to do so. It is difficult to track and manage spending. Customers are often surprised by unexpectedly high bills and unforeseen charges. They are often forced to pay for third-party tools and services to understand and optimize spending. It is too easy to overspend. Customers may inadvertently leave instances running. They tend to overprovision instances for peak demand. They often choose oversize instances. Another issue with current pricing models is that they are not actually consumptionbased. Pay-per-use pricing is meant to be a fundamental tenet of cloud computing, but most IaaS pricing, metering, and billing systems do not consider how much CPU time, for instance, is consumed. They simply measure how long an instance was retained for use. Whether customers manage to average 90 percent CPU utilization or just 10 percent, they pay the same. Similarly, if a noisy neighbor prevents customers from achieving their desired level of resource consumption, they must still pay the full price. While these issues are troublesome, they also present opportunities for service providers that are willing to take the risk and initiative to innovate new ways of pricing services. For example, Google recently introduced a new pricing model based on ongoing usage in which customers receive discounts the longer they run an instance. These built-in price reductions are an attractive way to save money without making the long-term commitment required for reserved instances. 5

6 IaaS pricing dynamics and developments To create a profitable pricing strategy, service providers must understand the current competitive dynamics in IaaS pricing as well as some of the major developments. Major players are serious about price reductions As you ve probably seen in the news, large-scale providers like Google, AWS, and Microsoft have recently engaged in an all-out price war, driving prices so low that few niche players dare follow. On March , Amazon announced its 42 nd wave of price reductions since 2008, reducing the price of EC2 compute instances between 10 percent and 40 percent and the price of S3 storage instances between 36 percent and 65 percent. These are some of the most significant price cuts Amazon has ever made. S3 prices have fallen exponentially since 2006, with minor price reductions in early years and more-drastic cuts in recent years. In fact, the price per gigabyte of S3 storage wasn t reduced at all for the first two years that Amazon offered its web services. These accelerating price reductions reflect Amazon s commitment to offering low prices on services. Although Amazon frequently reduces prices of its own accord, its most recent price reductions were in direct response to price cuts by Google. On March 25, 2014, Google announced price reductions of roughly 30 percent across all compute instances and introduced its new sustained-usage discounts. Amazon announced its own price reductions the very next day. And the following week, Microsoft made similar price cuts, reducing prices between 27 percent and 35 percent for its compute instances and 44 percent and 65 percent for storage. While Amazon used to be the 800-pound gorilla, Google and Microsoft are closing the market share gap. In its announcement, Google referenced Moore s law, the concept that the number of transistors and integrated circuits in digital electronics tends to double every two years: Over the past five years, hardware costs improved by 20-30% annually, but public cloud prices fell at just 8% a year. We think cloud pricing should track Moore s Law, so we re simplifying and reducing prices for our various ondemand, pay-as-you-go services by 30-85%. 6

7 This statement provides strong evidence that Google will continue with significant price reductions. The question is, How do you compete when the largest providers in the industry continue to drive prices lower? Further, how do you compete when the big three providers Amazon, Google, and Microsoft use their cloud services as loss leaders? Does profit matter? Extremely low prices can be unhealthy for a growing industry. Providers need competitive margins to invest in growth and innovation, and without profits, there is little incentive to push new innovation forward. Providers also need profit to stay in business; not everyone can afford to break even on services. When prices are unhealthy, you can end up with an industry like the airlines, where employees are unhappy, investors aren t sufficiently compensated, and the end customers aren t satisfied with their experience. These moves are not for everyone Most IaaS providers care about profit, and as a provider, you likely do too. Yet because AWS holds such a large market share, IaaS providers are under the false impression that they must match its prices to compete effectively. This isn t the case, and most providers would struggle if they tried to maintain price parity. True, even smaller players can maintain a positive margin when lowering prices. However, lower margins mean a more restricted ability to invest in innovation and growth. Even larger providers like IBM and Rackspace choose not to go toe-to-toe with Amazon and Google on price. Steve Mills, the SVP at IBM, was recently quoted on the topic of profit and AWS in an interview with Gigaom s Derrick Harris. He said, We don t have permission to not make money. We re not Amazon. This simple statement reflects the mind-set of many service providers. It also reflects the perception that Amazon is not held accountable by investors to produce profit. When asked in a media interview whether Rackspace would match the latest price cuts, CTO John Engates said, Rackspace is not a commodity cloud provider.... We do not base our prices on competitor s rental rates for raw infrastructure. Rackspace has for 15 years charged premium prices for premium service, expertise, performance and reliability. This model offers a more realistic approach for small-scale IaaS providers, one based on the value of service rather than basic resource capacity. 7

8 Recommendations As the largest IaaS providers use price cuts as a tool to gain market share, other players in the industry have questions about their own pricing strategies. For example, they ask whether they should start with the lowest possible prices and keep lowering them as costs improve. They also wonder whether they can survive an industry-wide price war. To achieve profitability and capture market share, smaller service providers need alternative pricing strategies. Building the right pricing strategy Regardless of the approach you take with pricing, there are a number of important considerations to keep in mind, including steps to take and steps to avoid: Your pricing strategy is intertwined with your customer strategy and competitive strategy. You must first understand your target customer and the competitors. Your prices and pricing models must be attractive to the target customer and offer advantages over competitors. You should try to identify and create differentiators capabilities in your IaaS that are not easily replicated and create significant value for your customers. Differentiated services will help you appeal more to certain customers, beat the competition in winning those customers, and improve margins for those services. Your operational model including cloud platforms, cloud services, equipment, processes, marketing, and sales should all align with and reinforce your unique capabilities, be consistent with your choice of target customers, and help you win against your competitors. Keep in mind these three common umbrella strategies: low prices, unique features and capabilities, and customized services. It is difficult to be the best at more than one of these. Pick the one that matters most and focus there. IaaS pricing strategies and options It should be clear by now that a winning pricing strategy must consider your unique situation and needs, including whether you are aiming for additional value and margin through layered services, low prices and high-volume sales, or unique capabilities and differentiators. These are some of the paths you can follow and customize to arrive at your optimal pricing approach. 8

9 Overcome current pricing-model issues Prices among service providers are difficult to compare. It is common for one service provider to have better prices for one type of workload (such as compute-intensive workloads) and another provider to have better prices for a different type of workload (such as I/O intensive workloads). Align your pricing model with your target customers needs and clearly communicate how it benefits them more than competitors. This could involve measuring and publishing price and performance data for your cloud versus competitors clouds. Auction pricing is in its infancy. Innovative providers could make improvements, for example, by adding the concept of reservations with the bidding process. Bidders and sellers could agree on not only a price but also the minimum and/or maximum amount of time the instance will be reserved. Develop a fundamentally different pricing model Move to a real consumption-based model where customers pay for the actual amount of IT resources consumed (CPU, RAM, storage) rather than the resources they have reserved. A la carte pricing may not be the best for you or your customers. At the same time, bundling related services such as compute with load balancers and firewalls is an underexplored area for innovation. Dramatically simplify your pricing model The Google sustained-usage model serves as an example. Customers get the reward of discounts without having to commit to extended-reservation time frames. Question whether your target customers really need on-demand, reserved, and auction pricing. The clarity of offering a single model, such as on-demand, could outweigh the potential benefits (and hassle) of picking a different model for each application. Deliver higher-value services with higher margins This can include managed services, proactive monitoring, 24-7 customer support, or consulting services for helping your customers architect a right-sized IaaS solution. Security and compliance are two more areas where customers are demanding improved support and functionality. 9

10 Not all of these strategies are compatible with one another, and they don t all apply to every service provider. They may also take significant work to implement. Focus on innovation while you develop and tune your pricing strategy. What to watch out for As you develop your pricing strategy, be aware that customers will always try to get the most value while saving money. For example, one way customers maximize utilization is by deploying multiple applications within containers on a single cloud instance. With the right mix of applications, customers can get close to 100 percent utilization. If you oversubscribe instances, your other customers could suffer performance issues related to these noisy neighbors. Some customers also test their cloud instances for noise. If they detect issues, they simply terminate their instances and redeploy. The thing to remember is that customers will find ways to get the most out of whatever pricing model you design. Try to anticipate these methods and tune your model as needed. Recommendations for those building their own IaaS When building underlying infrastructure (as opposed to reselling IaaS from a wholesale provider), you should understand that there are still opportunities for differentiation. This could mean implementing specialized instead of commodity hardware. It can also mean architecting the underlying infrastructure to support things such as high availability, increased IOPS, enhanced networking, or other capabilities. The right infrastructure should also enable innovative pricing models that meet the demands of your target customers. For example, some businesses require best-in-class hardware that supports applications that were not originally designed to operate in a scale-out environment. With the right infrastructure, you can charge a premium and achieve higher margins. Recommendations for IaaS resellers, including MSPs A few years ago, MSPs built their own storage vaults (i.e., data centers) to store customer data. However, as the aggressive price wars have continued, it no longer makes economic sense for MSPs to follow this approach. More MSPs are now concentrating on their core competency of delivering managed services, and they resell infrastructure from largescale IaaS providers. 10

11 Resellers have some slightly different challenges to address. As a reseller, you ll need to work within the constraints of your provider s service model. This means it is extremely important to choose the right wholesale provider, one that provides the capabilities and flexibility you need to best serve your target market. For example, does your provider offer multiple types of compute services, such as virtual and dedicated servers, or different types of storage, such as object, block, or file? 11

12 Conclusion When selling or reselling infrastructure services, price does indeed matter. However, you don t need the lowest prices to be successful. There is still plenty of room for differentiation and innovation, and many customers need services that go beyond basic commoditized offerings. With the right pricing strategy, you can successfully deliver infrastructure services that provide real value to customers and generate substantial profitability for your business. 12

13 About Paul Burns Paul Burns is the president and founder of Neovise, an IT industry analyst firm launched in 2009 to focus on cloud computing. Burns also writes articles for industry publications, speaks at industry events, and is quoted by a variety of media organizations. Burns has over 25 years of experience in the IT industry, driving strategy for enterprise software solutions through product management, competitive analysis, and business planning. He has held a series of leadership positions in marketing and R&D, and he was research director of the IT service management practice at another industry analyst firm. Burns earned both a B.S. in Computer Science and an M.B.A. from Colorado State University. 13

14 About Gigaom Research Gigaom Research gives you insider access to expert industry insights on emerging markets. Focused on delivering highly relevant and timely research to the people who need it most, our analysis, reports, and original research come from the most respected voices in the industry. Whether you re beginning to learn about a new market or are an industry insider, Gigaom Research addresses the need for relevant, illuminating insights into the industry s most dynamic markets. Visit us at: research.gigaom.com. Giga Omni Media "" is a trademark of Giga Omni Media. For permission to reproduce this report, please contact pro-sales@gigaom.com. 14