Amazon Web Services announced it is dropping the prices of dedicated instances on EC2 cloud computing by up to 80 percent. Before talk of price wars and commoditization kicks in, there’s a very strategic reason for Amazon's moves.
So what’s the impetus for price cuts for this particular product? Given that IBM strengthened its position with "born on cloud" companies through its acquisition of SoftLayer, it makes sense that Amazon would continue to try to push upmarket, towards the enterprise, given its strengths with startups. Both companies are targeting one another’s strongholds.
Amazon’s announcement might have impacted financial sentiment of at least one of their competitors. Rackspace stock dipped as much as 8.5% today, perhaps amidst concerns that the AWS price cuts might affect Rackspace's cloud business. Rackspace has a lot of dedicated and managed cloud customers, so the cuts in AWS’ dedicated EC2 offerings could potentially be seen as a threat to this business.
The latest price drops are for dedicated instances, which are different from regular EC2 instances in that they run on single-tenant hardware. These instances are ideal for enterprise workloads, especially those under the umbrella of corporate policies or industry regulations. They are isolated from other instances belonging to other customers at the host hardware level.
Here are the price cuts:
- Dedicated Per Region Fee - An 80% price reduction from $10 per hour to $2 per hour in any Region where at least one Dedicated Instance of any type is running.
- Dedicated On-Demand Instances - A reduction of up to 37% in hourly costs. For example the price of anm1.xlarge Dedicated Instance in the US East (Northern Virginia) Region will drop from $0.840 per hour to $0.528 per hour.
- Dedicated Reserved Instances - A reduction of up to 57% on the Reserved Instance upfront fee and the hourly instance usage fee. Dedicated Reserved Instances also provide additional savings of up to 65% compared to Dedicated On-Demand instances.
There have been several price cuts this year at AWS (as well as Google and Microsoft), prompting many to declare a price war. A RightScale survey in March of this year documented the price reductions, with AWS leading the pack with 29 price cuts over a 14 month period. Comparing cloud prices is often like comparing apples to oranges; However, these particular cuts appear to be very strategically driven.
AWS wants to win over the enterprise. The company releases Data Warehouse service called Redshift last February. There was also AWS Glacier, a low cost cold storage/archive storage, and some high memory instances. The company is clearly expanding its product and feature sets to appeal to the enterprise, and with these particular price cuts, to appeal to the pocketbooks of the enterprise.
There most likely will be cuts by the competitors in tow, and more price cuts down the line. AWS is the clear leader in terms of cloud market share, but it desperately wants to win the enterprise customer and build on its strengths with “born on cloud” and internet-centric companies.