Cloud Pricing War 2.0 Kicks Off As Microsoft Takes On Amazon

  • Microsoft has cut Azure prices in response to recent cuts by Amazon on AWS.
  • Microsoft's price cuts are substantially bigger than Amazon's.
  • How is this likely to impact on Microsoft's cloud momentum?

After a ceasefire that lasted one whole year, cloud titans have now launched a fresh round of cloud pricing war, this time with Amazon (NASDAQ:AMZN) AWS squaring it off with Microsoft (NASDAQ:MSFT) Azure. Microsoft has followed Amazon’s lead and cut Azure prices. About a week earlier, Amazon had announced that it had cut the prices of AWS EC2 cloud computing instances by 5%.

In a blog post, Microsoft openly admits that its cloud price cuts were done as a defensive move against Amazon saying:

“We have had a longstanding commitment to make our prices comparable on commodity services like compute, storage, and bandwidth relative to Amazon Web Services. In keeping to this commitment, we are announcing price reductions up to 17% on the latest version of the popular Azure D-series virtual machines, Dv2 Virtual Machines. Dv2 Virtual Machines sport 35% faster CPUs than D “v1” virtual machines and are based on the newest generation Intel Xeon (Haswell) processors.”

The new round of price cuts will probably place Azure pretty close to AWS in terms of pricing. Azure’s price cuts are substantially bigger than AWS:

Virtual Machine Type Price Reduction
(Windows Server Instances)
Price Reduction
(Linux Instances)
D1-D5 v2 10% 14%
D11-14 v2 13% 17%

Source: Microsoft Blog

But AWS was the cheapest cloud vendor after the last intense round of price cuts that ended in late 2014.

MSFT-1

Source: Business Insider

You will notice that even though we usually only get to hear of cloud price cuts by the likes of Amazon, Microsoft, IBM (NYSE:IBM) and Alphabet Inc-C (NASDAQ:GOOG), other large cloud players have been cutting prices as well.

Price Cuts Could Slow Down Azure’s Momentum--Temporarily

While Microsoft has chosen to effect bigger price cuts than AWS to remain competitive with its larger rival, the cuts could have a more sinister side. During the last round of price cuts in 2014, Amazon cut its cloud prices by the biggest margin. The result was that AWS revenue growth slowed down from 60% in 2013 to just 40% by the end of 2014. The troughs in the graph below represent periods after AWS price cuts, with 2014 being the nadir.

MSFT-2

Source: Venture Beat

It’s clearly evident that AWS revenue growth took a dip immediately after cutting prices, the extent of which is determined by the severity of the cuts. Azure price cuts this time round are not quite as dramatic as AWS’ were in 2014, but could still have a tangible effect on revenue growth. I estimate the current price cuts by Azure could nick off 5-7 percentage points off the cloud’s revenue growth for 2-3 quarters.

Luckily, the good part is that the effect is likely to be only ephemeral. AWS rebounded strongly after the price cuts of 2014 by posting an impressive revenue growth rate of 78% during Q3 2015 to $2.08B.

Microsoft’s cloud growth is still the highest among the large cloud vendors, with Azure recording triple-digit growth during the last quarter (Microsoft does not break out Azure revenue figures). Microsoft’s cloud platform has been growing so fast not so much because of the company’s technological expertise but rather due to how efficient Microsoft has been at leveraging its large established customer base.

Many of Microsoft’s enterprise customers have signed ELAs, or Enterprise Licensing Agreements. These are contracts that allow these customers to enjoy steep discounts on their Microsoft enterprise software. Microsoft is able to use these ELAs as an incentive for these customers to try out Azure.

Moreover, Azure is fully optimized to easily run applications that were built on. NET platform, which has remained Microsoft’s standard Windows programming language for more than 15 years now. This makes it easy for enterprise customers to move their Windows app to the Azure platform with a minimum of fuss, which is not something they can easily do with other rival cloud platforms.

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