Amazon Drops EC2 Prices. Can We Expect More Reductions?

Effective September 1, 2010, we’ve reduced the On-Demand and Reserved Instance prices on the m2.2xlarge (High-Memory Double Extra Large) and the m2.4xlarge (High-Memory Quadruple Extra Large) by up to 19% and the Reserved Instances by up to 17%.  If you have existing Reserved Instances your hourly usage rate will automatically be lowered to the new usage rate and your estimated bill will reflect these changes later this month.  As an example, the hourly cost for an m2.4xlarge instance running Linux/Unix in the us-east Region from $2.40 to $2.00

This is pretty much expected and I also expect further reductions in the future as Amazon faces much higher market pressure than they are used to in the past. The predictions by UBS analysts on the gross margins for AWS shows that Amazon has lots of leeway to compete in the market that sees increased push not only from other public cloud providers but also from private cloud vendors too.

According to UBS, Amazon Web Services gross margins for the years 2006 through 2014 are 47%, 48%, 48%, 49%, 49%, 50%, 50.5%, 51%, 53%.

In the same post, I raised the following question

Did we get the dynamics wrong? If infrastructure business is not a low margin business, what kind of impact will projects like Openstack.org will have on the industry?

I was planning to do a follow up post talking about how Openstack.org and other players will bring in much needed competition to AWS and bring the prices down (eventually making infrastructure services a commodity). But Simon Wardley tweeted the same in a more concise manner and I decided against doing another post on the same topic.

@krishnan : without a competitive market (easy switching etc) then margins will be high as there is no strong pricing competition.

@krishnan : openstack will help form that market, grow the volumes further (reduce adoption barriers) and margins will reduce.

@krishnan : Also, if you want to make comparisons to cloud, then you should look at the margins in outsourcing not hardware (a component)

I guess Amazon is already seeing the market pressure from all sides and this price reduction could be an adjustment towards the necessary price reduction to maintain their big marketshare. As Simon pointed out (which I also agree), Openstack.org (in spite of what AWS fanboys would want us to believe) definitely has serious potential to threaten Amazon’s dominance in the public cloud marketplace. When we add the push from VMware on the private cloud side (with their claims about superior performance and security with vCloud compared to Amazon’s or any other public cloud), there is definitely a build up of pressure against Amazon in the cloud marketplace.

1. If VMware could convince that their way of doing cloud is the only option to get high performance and security
2. If Openstack.org really takes off with more and more service providers using it for delivering infrastructure services (my wishful open federated ecosystem dream)
3. If Amazon goes on a price reduction game plan to negate the impacts of (1) and (2) (among other competition)