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BLOG: The great cloud computing pricing debate

Bernard Golden | Nov. 29, 2011
A continuing controversy in cloud computing is its putative cost benefits; specifically, whether public cloud computing can provide cost advantages over computing carried out within a company's own data center.

It is true that Moore's Law typically means that the cost of computing drops rapidly over time. Extremely rapidly. This phenomenon is so powerful that it has transformed our economy for 40 years.

It is a mistake, however, to believe that Amazon's costs (and, by extension, those of public cloud providers in general) are somehow not capable of realizing those benefits. It is also a mistake to believe that public cloud providers' prices are likely to remain at current levels for the foreseeable future and that the right benchmark to compare internal cloud prices against is current public cloud prices.

There can be little doubt that public cloud providers are achieving more computing bang for the buck every day. It doesn't mean that their appropriate response is to drop prices, however. Why is that?

I'm reminded of an anecdote I read a decade or so ago. IDG (owner of CIO magazine and CIO.com) had started a magazine in China. Its business was going fantastically. So fantastically, in fact, it had a problem: too much demand for ad space. They literally couldn't produce a large enough magazine to print all of the ads that advertisers wanted to place. The magazine publisher described the issue to Pat McGovern, CEO of IDG, who responded thusly: "That problem is easy to solve. Just double your prices and let the advertisers decide which ads ought to get printed."

Why is this anecdote relevant to the Moore's Law pricing discussion? Just this: Amazon is currently in the same position as that Chinese magazine was a decade ago. Amazon is notoriously close-mouthed about how its cloud business is going, but recently it published some figures about how many objects its S3 storage service contains. Amazon has more than doubled the number of objects it stores over the past nine months. Now it stores over half a trillion objects in total, with the growth clearly accelerating.

As another data point, at last April's CloudConnect conference, Werner Vogels, Amazon CTO, said that every day AWS is installing as much computing capacity as it used to run the entire company in 2001.

In such an environment, it seems likely that Amazon is challenged just to keep up with demand. This challenge may be evinced by the fact that last year AWS users ran into problems when one of AWS's eastern Availability Zones would run out of capacity on a frequent basis.

The obvious inference from this challenge is that Amazon is not reducing its prices at a rate appropriate with "Moore's Law" because doing so would exacerbate its main challenge: keeping up with demand.

A second inference is that, Amazon could reduce its prices, since it is experiencing lower costs due to the progress of Moore's Law. The fact that it has not done so thus far means nothing about what it might do if the enormously high growth rates it currently faces moderate.

 

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