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Cloud Object Storage: Another Race to the Bottom?

Just when industry analysts were starting to believe that the buyers of cloud computing services were motivated more by upside business opportunity, and less by cutting IT infrastructure costs, a new price war has erupted that's driven yet another vendor race to the bottom.

In its latest analysis of cloud computing services, 451 Research revealed that the cloud price battlefield has shifted from virtual machines (VMs) to cloud object storage. The analyst firm predicts that other services -- particularly databases -- will undergo the same pricing pressures over the next 18 months.

Cloud Services Market Development

Until recently, the prices of cloud related services beyond compute held steady in the face of intense vendor competition, according to the latest market study by 451 Research. Virtual machines have been the traditional battleground for price cuts, as providers have sought to gain attention and differentiation.

The tide has now turned, with cloud object storage pricing declining in every region, including a drop of 14 percent over the past 12 months. For comparison, the cloud mainstay of VMs has dropped a relatively small 5 percent over the same period.

Analysts believe market maturity is leading to cloud service price cuts moving beyond compute. Other factors include increasing cloud-native development and faith in the cloud model, as well as a competitive scrum to capture data migrating away from legacy on-premises IT infrastructure.

While some in the industry have speculated that public cloud service providers have been using cheap VMs as loss-leaders in their product portfolios, 451 Research finds that, even in the worst case, profit margins for VMs are at least 30 percent.

According to the 451 assessment, there's no justification to believe that cloud computing is anywhere near a commodity, just yet. Analysts believe the cloud market is not highly price sensitive at this time, although naturally, end users want to make sure they are paying a reasonable price.

"The big cloud providers appear to be playing an aggressive game of tit for tat, cutting object storage prices to avoid standing out as expensive," said Jean Atelsek, analyst at 451 Research.

Outlook for More Cloud Price Cuts

This is the first time there has been a big price war outside compute, and it reflects the fact that cloud object storage has moved into the mainstream. While price cuts are good news for cloud buyers, they are now faced with a new level of complexity when comparing service providers.

The cloud storage battle started in the third quarter of 2016, when 451 Research identified a reduction in the IBM SoftLayer (now part of Bluemix) cloud object storage prices. Google, AWS and then Microsoft followed suit, with price cuts as well.

The 451 Research Digital Economics Unit predicts that prices for virtual machines and cloud object storage will continue to come down, with relational databases likely to be the next competitive battle front.

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