451 Research (https://www.451alliance.com/) provided an interesting discussion today regarding if cloud computing has reached the point where it can be treated as a commodity. They pose the question and then follow through with a logical discussion which is an interesting read if you have an interest in market trends and the growth of cloud computing.
Based on 451 Research studies – including the Cloud Price Index – there is little evidence that the cloud market is commoditizing.
The most recent 451 Cloud Price Index research explores commoditization based on provider pricing and market shares. It addresses questions such as:
- In which global regions is price competition driving
margins down, and in which regions does a lack of competition drive
margins up?
- In which markets are end users purely looking for the
cheapest options?
- In which geographies are end users willing to spend
more on quality?
- Does a cheaper price win more business for cloud
providers, or are end users more concerned with other factors?
These questions provide a basis for assessing commoditization. (A commodity is a good or service assessed purely on price.)
Measuring Commoditization: Methodology
451 Research plotted cloud providers’ market shares (from the 451 Market Monitor service) against their prices for a small set of services (just VM compute and bandwidth) in the Cloud Price Index.
Plotting trend lines through price/share points for various geographies enables measuring the degree of commoditization.
Using the Pearson equation for measuring the relationship between two variables (in this case, price and market share) provides a basis for what 451 Research calls the Cloud Commodity Score (CCS).
A CCS value of 0% would indicate there is no correlation between price and market share; a CCS value of 100% would result in a straight vertical line that translates into the highest level of commoditization.
The chart below shows the CCS values and the relationship between market share and price for the US, Europe and APAC. The greater the slope, the greater impact price has on market share (and the higher the commoditization).
Plotting the Commoditization of Cloud
Analysis
A key finding illustrated in this chart is that none of the regions are anywhere near a vertical line (which would indicate a pure commodity market). This suggests that price is certainly not the leading decision criterion for many end users.
For all regions, there is a limited relationship between price and market share: Being cheap doesn’t guarantee more revenue, and being expensive doesn’t guarantee less revenue. End users are willing to pay for other things, rather than simply always going for the cheapest option.
In short, the cloud market is a long way from commoditization.
451 Research studies have found that the US is the least expensive – and therefore the most competitive and commoditized – geography in terms of cloud services. In the US, cheaper prices are more likely to drive cloud providers’ market shares.
Europe
On average, Europe is 3% more expensive than the US for the same cloud services, and price is less likely to impact market share compared with the US. European end users are willing to pay more than US users (which is in part why services cost more).
But why are they willing to pay more?
One reason has to do with data movement between countries and a related concern: data protection. European users are willing to pay more to keep data in-country, rather than spreading it out over different European Union countries just to get lower prices.
In addition, European users face a confusing mix of national and EU regulations. Keeping data in-country mitigates the confusion, even though it may entail higher prices.
Hosting data in-country makes it easier for users (as well as providers) to meet compliance, performance and availability requirements.
APAC
In the APAC region, cloud service prices are 19% higher than in the US. Asia-Pacific is the region where price is least likely to matter to end users. This translates into a less competitive – and less commoditized – environment for cloud providers.
The 451 Research study showed that, as in Europe, users in APAC often demand in-country hosting; in the case of APAC, it’s primarily for performance reasons.
Data protection is another reason why APAC users often require in-country hosting, despite the higher costs associated with fewer provider choices. Keeping data local frees users from dealing with the complexities of multiple data-protection laws.
Conclusions
In all regions, it’s clear that the cloud services market is far from being a commodity market.
End users see value in factors beyond price; otherwise, the cheapest cloud service providers would be pulling in the most revenue and market share.
451 Research’s Voice of the Enterprise service continually finds that factors other than price – such as security, compliance, support and client-provider relationships – are key decision criteria.
It’s important to bear in mind that in this study 451 Research used a small set of services – only VM compute and bandwidth. Factoring in more differentiated value-added services – such as databases, storage and PaaS – there will be even fewer signs of a move toward commoditization.
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