Cost of Cloud Computing Continued to Go Down

Cost of cloud computing this week went down to historic low as Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) engaged in a price war to slash price of various services such as running softwares, applications and websites. The recent move by these two industry rivals has also significantly reduced cost of storing large amounts of data on their cloud platforms.

At first, Google announced on March 25, that the search engine giant is cutting prices across several of its cloud computing services in order to make its products more competitive against Amazon's Web Services. For example, sustained use discounts will be around 53% of its previous pricing plan. The cost of using its servers will effectively go down from around US$ 0.11 to US$ 0.06 per hour on average.

In the blog post, Google said cloud computing prices have not followed Moore's law. 'over the past five years, hardware costs improved by 20-30% annually but public cloud prices fell by just 8% per year,' said Google.

Within a day (twenty hours to be precise), the man largely responsible for the world's largest cloud computing platform, Amazon Web Services, Andy Jassy came out with an announcement to cut the price of its Elastic Compute Cloud by 30 to 40 percent. Amazon also ended up reducing cloud storage prices by 51%.

These two events establish three hard facts. First, Amazon was pursuing a 'value based pricing strategy,' where it charged way more to customers for its cloud services compared to the cost of building its infrastructure in terms of hardware and support service costs. Secondly, Google saw the divergence and engaged in a 'penetration pricing strategy ' to exploit this opportunity. The mentioning of Moore's law in the announcement certainly was done to expose Amazon's huge profit margins. Lastly, the whole fiasco makes us more optimistic about market power to bring customers the best service at a competitive price.

According to IDC, IT cloud services spending went from only US$ 16 billion in 2008 to US$ 42 billion in 2012. During the same time, business application usages went down to 52% from 57%and cloud storage usages went up from 5% to 13%. As more users realize the potential of cloud storage and running on-demand computing on cloud platforms, the cost is likely to go down further in coming years. However, this will certainly mean reduced profitability for Amazon Web Services next quarter.