Amazon in the Headlines | Gaining Altitude in the Cloud

Posted On March 6, 2012

I’m sure many of you have read the reports of Amazon’s new CEO’s steps to revitalize the company’s growth. News of restructuring that could involve widespread layoffs that cut deeply across Amazon, including some of its key development areas are also driving changes across the company’s management ranks.

Meanwhile, there’s at least one part of Amazon that is taking aggressive steps to fuel growth rather than cutbacks.

Amazon Web Services (AWS) announced today that it is reducing prices for the 19th time in the last six years. And it’s not just a nudge downward:

  • EC2 prices for longer term (3-year) Reserved Instances in some configurations are dropping by 35 to 40 percent
  • EC2 On Demand prices for high memory instances are now 10 percent lower
  • Similar price reductions span services beyond EC2 as well (e.g., RDS, EMR, ElastiCache)

While the reductions are meaningful for its flagship EC2 On Demand services, I interpret the very large reductions for longer term Reserved Instances as yet another salvo that plays to the enterprise market. Moreover, the introduction of volume tiering that enables additional discounts should turn many CIOs heads who are in the midst of pilots that test the value of cloud services in a modest way.  Spend over US$250K on Reserved Instances and get 10 percent off the amounts above that level – more than $2 million steps that up to a 20 percent incremental discount. And finally, in a distinct departure from previous positions, AWS is inviting “one off” deals by asking those spending more than $5 million to “call me!”  Some of AWS’ largest users are ending up with pricing that is over 50 percent lower than before these actions.

The business case for broader adoption across the enterprise continues to get stronger. Enterprises should be including ongoing pricing improvements in their Infrastructure-as-a-Service models; can internally-delivered infrastructure be cost competitive with options that are likely to drop another 20 percent over the next few years?

AWS appears to continue its leadership in cloud infrastructure services with this pricing action, and it continues to add solutions and features that should appeal to enterprise buyers. Recent discussions with enterprise CIOs, however, suggest a gap continues to exist – at Amazon and most of the other cloud service providers – around the ease of enterprise solutioning. The low touch, self-service approach enables attractive price points but still leaves the enterprise with do-it-yourself tasks that impede their widespread adoption of mainstream solutions.  AWS’ strategy appears to rely on the VAR / SI channel do the solutioning, focusing on the horizontal cloud delivery platforms (which we suspect may be higher margin, at least for AWS). This provides an opening for other cloud pioneers – Rackspace, Savvis, Terremark, and others – to step up to fulfill the enterprise market’s needs for true enterprise-class solutions that include the all-important solutioning capabilities. Competing on price is essential – but the value player is likely to seize the enterprise leadership role in the long run.

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