The picture above looks like something you may see in a science fiction movie. Perhaps it’s a spaceship, the interior of a living computer, or something else entirely that we can’t even imagine.
It turns out that this is the inside of a data center owned by Google in Oklahoma. On each one of the computers built into the side of these walls is data hosted from companies all around the world.
And, as it turns out, the price to rent out storage in one of these data centers has been dropping rapidly over the past year. The big three in cloud storage (Amazon, Google, and Microsoft) have been cutting their prices 30-60% in an effort to stake their claim as the new landlords of data storage.
The war for the cloud has begun.
Back in 2006 Amazon launched Amazon Web Services (AWS) which allowed companies to rent space in their data centers. This was a great boon for small and medium sized companies especially, because they no longer had to spend a substantial amount of money up front to host their own data.
The prototypical example is Netflix, which hosts all of its video streaming on AWS (and, by the way, makes up 1/3 of all internet traffic during peak hours).
It’s pretty strange that Amazon came to dominate this market (they are larger than the next 14 cloud providers put together). Certainly there were other tech companies that had the infrastructure to take this market way before Amazon ever dreamed of it (ex: Google). But for some reason they didn’t.
Why a Price War?
There seem to be three main reasons why cloud storage is entering a price war:
1. The Major Players are Diversified. Each of the Big 3 players makes their money elsewhere (Google on advertising, Amazon on retail, and Microsoft on software). They can afford to take hit on profitability today for a future payout. Some of the niche players in this industry (Box and Dropbox), may not be so lucky.
2. Market Share is Extremely Valuable. The money isn’t in renting out the infrastructure but the applications and services that runs on top of them. Once you’re a customer of AWS, Amazon has the possibility to sell you a whole suite of services. Not to mention it’ll give them access to all of your data and they’ll be able to see what’s going on in the market and which companies they should buy. There’s a tremendous advantage to having more customers.
3. This is a High Fixed Cost Industry. Building a data center is expensive. Once you have it, to recoup costs it makes sense to try to sell as much service as you can, even if you’re making a slim margin or taking a loss. You need to recoup your fixed costs somehow.
The price of cloud storage has been decreasing drastically as each of the Big 3 try to dominate the market. This could be potentially a great thing for internet companies as a whole, which now don’t have to put up a substantial amount of money to get off the ground.
The question becomes, what occurs in the long term? Who ends up dominating this market and what happens when the price war ends?