One day after Google announced a substantial price reduction for their cloud services, Amazon announced their own dramatic price reduction on several AWS offerings. This move will reduce the revenues of one of Amazon’s most profitable services, the S3, by about 50%. What were the AWS leaders thinking just before Andy Jassy went on the SF summit stage?
This decision raises a few questions about Amazon’s market strategy. Why would a leading company willingly cut their successful stream of revenues so suddenly in light of a new competition? Aside from the profit loss, Will this move – stop the IaaS vendors’ race to zero? will it position GCP a notable player in the cloud arena, as AWS largest direct competitor.
AWS Put Google Out Front
This is reminiscent of an event that recently took place in Israel. “Cofix” is a new Israeli coffee shop chain that decided to charge 5 NIS per coffee cup, much lower than other chains where the average prices was about 12 NIS. Subsequently, many other coffee shop chains decreased their prices. This immensely increased the popularity of Cofix, and immediately positioned it as a prominent competitor in the national market.
A similar dynamic is apparent as Amazon follows Google’s price reduction. Amazon’s action has placed a spotlight on Google as a key player in the cloud market, second only to AWS. Giving their new competitors such a grand introduction might prove harmful to Amazon’s future market share.
Apple, for example, didn’t adapt this strategy. When Samsung and Google introduced their new products into the smartphone market, iPhone prices remained steady and unaffected by the new competition. Amazon’s price reduction might not have been triggered by Google’s announcement, nonetheless it caused the market to view Google as a worthy competitor.
Stop the Race to Zero
Amazon might have been trying to put the breaks on the cloud’s race to zero in terms of cost. Cloud prices have been plummeting rapidly, as cloud vendors try to prove that the single resource should be cheap. Amazon’s drastic price decrease showed the market that, in this race, prices are moving down in tandem. This might send a clear message to vendors: if they want to make any profit off their cloud services, they must put a stop to the price deflation. However it is important for any business to maintain reasonable prices in order to fulfill and preserve the quality of their products and services. Will the race stop? Probably not.
As consumers, this event teaches us to be wary of organizations claiming to offer great prices. If Amazon could instantly cut 50% of their S3 revenues, apparently their margins were quite high. When a company creates a market and is its undisputed leader, it stands to reason that they will take advantage of high margins to generate as much profit as possible until a viable competitor emerges.
am I missing something?
[UPDATE] Interesting reply by Cloudyn CEO
@IAmOnDemand It has nothing to do with S3 profit margins. AWS drop prices because its the fastest to adopt. EC2 w/ high profit to follow.— Sharon Wagner (@Sharon_Wagner) April 13, 2014