There is a war going on in cloud, a price war. In the second half of 2015 there was a lull on the battlefield. And, while you may not have heard much lately, Amazon Web Services (AWS) has slashed prices fifty times over its almost ten year history. Microsoft and Google have met each reduction and vow to always meet or beat.

The wreckage lies all over the place outside of these major players. Big boys, like HP are out, and smaller cloud providers are following the: “if you can’t lick ‘em, join ‘em” approach. On the other hand, this has produced a never-ending bounty for users.

Well, so much for the lull. With the start of the New Year, AWS launched its 51st price reduction, dropping prices 5% on some of its most popular offerings. The inevitable swirl has started among combatants about who is cheaper, better, faster and what will be the competitors’ response given their prior claims.

As current or future users – most pundits predict you are going to buy cloud soon if you have not already – a couple of questions come to mind: How long can they keep this up? How do they do it?

First, let’s look at how long they can keep this up. For a number of years Amazon was suspected of running its cloud services at a loss or very little profit. After all, they sure ran their retail operations like that. Well last year, for the first time, Amazon started to separately report the performance of AWS in its financials.

Not only did it reveal it was a multi-million dollar revenue beast but that it was insanely profitable. Through the years, I always thought this might be true. Why? Well, both back then and to this day, AWS will give you a discount of up to 72% off list price if you are willing to specify some commitment to purchase capacity over time.  This told me there was a lot of margin in the business and now coupled with the public results of profitability, it tells me they can keep up the price leadership game for a long, long time. Guess it’s working – AWS latest quarter reported revenue growth at 80%.

Now, how do they do it? The big cloud providers have totally flipped the concept of data center operations on its head. By standardizing, automating and scaling on a level not seen before in information technology they changed the economics to the point where the cost of computing approaches just the cost of the power to do it. (For a more detailed explanation please check out an earlier post.)

Bottom line: Even if you discount the agility and flexibility that cloud computing provides, the economics are hard to escape. No upfront capital costs, pay as you use and – oh yes, your price will be lower next year. Sounds like music to a CFO’s ears.

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