Are Cloud Prices Becoming A Race To The Bottom?

As Microsoft cuts cloud service prices as part of the kick-off of its Windows Azure Infrastructure Services rollout, channel partners have begun wondering how low prices might go.

The Redmond, Wash.-based company is reducing the costs of its virtual machines and cloud services by 21 to 33 percent as part of an effort to match Amazon Web Services prices for cloud compute and storage services. News of such cuts, combined with repeated price cutting at Amazon, is raising questions in the minds of channel partners regarding how to build profitable offerings in a market where such reductions are likely to reset customer expectations each time price cuts occur. Although ongoing contracts are not likely to be put at risk, new business can more easily be impacted.

"It's becoming more of a commodity-type business," said Greg Emplit, general manager of Nextpoint Information Systems, a Seattle-based channel partner. "All of a sudden, it's all about volume. It's kind of like the old hardware days, where the more you sell, the more you make, but you're not making very much on any one thing. The question becomes, where is the bottom, and how low do they go?"

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Emplit believes that on the one hand, price-cutting will drive share shift, but he also added that the trend might stimulate more business by making customers more willing to adopt cloud solutions based on lower prices, when they otherwise might be more inclined to stay with customer premise solutions.

"I think there's enough new business out there that has not been closed, and that is what they are chasing," he said. "Right now, the solutions are a little bit sticky, and it can be difficult to change from one provider to another. We will have to see if that is still the case three to five years down the road."

Meanwhile, Daniel Cheng, president AMA, Inc., a Mississauga, Ontario-based channel partner, agrees that the price-cutting is designed to attract the mass market toward the cloud. But, he is hoping that the cuts are based on lower costs, rather than on margin reductions that could one day leave the channel holding the bag.

"Part of the cost-cutting ... is coming from efficiency, in the sense that [cloud services providers] are optimizing their data centers, and reducing the use of energy, and leveraging those kinds of initiatives," he said. "So in that respect, they can pass on the savings to the end customer. I'm hoping it will stimulate sales, but if this turns into a zero-sum game that threatens margins, then the loser is likely to be the partner because the service providers will certainly protect their own profitability."

As to share shift, Cheng expects that it will not only be driven by the price but also by the applications customers use.

"It's not always easy to shift from one provider to another," he said. "It is easier to shift with something like Web conferencing, for example, because things like that involve one-time events, for the most part. But for other applications, such as email, it can be a lot more difficult to move from one provider to the other in order to get a few extra points of discount."

NEXT: 'We Don't Call Ourselves IT Consultants'

Questions about prices are also among the key reasons why some channel partners have chosen to remain on the sidelines until the channel's future with the cloud becomes clear.

"We're not doing too much cloud right now," said Carmine Taglialatela, vice president of business development for TecPort Solutions of Delaplane, Va. "The price pressure and issues around security are largely keeping us away from the cloud right now. If the cloud people could resolve those two things, we would more than likely be willing to adopt."

As cloud services gather momentum, channel partners are forced to adopt completely new strategies for the sale of technology, as the emphasis shifts not only to recurring revenue but also toward a more consultative approach than ever before.

"We can't call ourselves IT consultants anymore, or even engineers," said Paul Smith, a partner at Walpole, Mass-based Datasmith Network Solutions. "We are business advisors now. We have to learn the way the customer does business, and be able to come up with viable advice on how they can use IT to speed their processes or make them more efficient. You can't expect the customers to really understand the best solution and be able to articulate their technology needs. You have to spend time becoming acquainted with their business so that you can recommend a turnkey solution. You have to be an advisor and an educator."

PUBLISHED APRIL 16, 2013