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AWS, Rackspace cloud pricing battle: The red herring of IaaS

Cloud providers are sniping at each other over differences in IaaS prices, but IT pros say other factors are more important in choosing a cloud.

Infrastructure as a Service providers continue to cut cloud pricing in an effort to lure new customers, but many corporate cloud customers see this race to the bottom as a marketing stunt -- and they won't take the bait.

Amazon Web Services cut dedicated instance prices in mid-July, which was quickly followed by a Rackspace Inc. blog post that questioned whether AWS' dedicated instances are truly dedicated at all, and claimed a price and performance advantage.

Don't ever use cost savings as a driver to go to the cloud.

Nathan McBride,
chief cloud architect, AMAG Pharmaceuticals Inc.

Into this fray then stepped another Infrastructure as a Service (IaaS) provider, Cambridge, Mass.-based ProfitBricks Inc., whose executives accused both AWS and Rackspace of being less than truthful about gross margins for cloud services. ProfitBricks also cut its own IaaS prices by 50%.

While customers are aware of intensifying cloud pricing competition and think it's healthy for the market as a whole, it doesn't mean they will drop their current service provider to seek lower costs elsewhere.

"There's a lot more to the decision than that," said Phil Jones, vice president for Bluebird Auto Rental Systems, a Dover, N.J.-based firm that handles credit card transactions for auto rental centers worldwide.

ProfitBricks' 50% pricing drop is "something to take notice of, but then you have to look at the company and figure out who they are as well. Are they going to be around? What's their track record?" Jones said.

Independent software vendor partnerships can also play a role in the selection of a cloud vendor. Bluebird currently works with Progress Software Corp., which is already being developed for integration with AWS, Jones said.

Cloud pricing not the only factor

Cloud pricing is just one of the many factors that go into the service provider selection process.

"We look at the big names," said a director of engineering for a Fortune 100 company who requested anonymity. "We want vendors that are good at distributed computing. If Facebook all of a sudden said, 'We want to farm out a percentage of our [data centers],' we would love that, because we're looking for someone who can provide Infrastructure as a Service … at scale and do it well."

Enterprise IT pros can be somewhat skeptical of smaller providers, such as ProfitBricks, but even a 50% price drop couldn't persuade at least one shop that uses both Amazon and Rackspace to change.

"We would definitely let it continue to influence us to move, but it's not the ultimate thing," said Jim O'Neill, CIO of the hosted marketing software provider HubSpot Inc., based in Cambridge, Mass. "It would definitely be a nice thing, but it wouldn't be the driver to move."

The cost of switching cloud service providers can also be high -- as much as $500 to $1,000 per server, according to Anthony Pagano, director of StrataScape Technologies, an IT consulting firm based in Philadelphia.

"It's not just the monthly costs you have to think about; you have to think about the costs there might be to get on board with a provider, and what is your exit strategy?" Pagano said. "What are the costs to do that?"

What cloud cost savings?

Some IT pros dismiss cost savings in the cloud as a red herring altogether, especially for new customers.

"Don't ever use cost savings as a driver to go to the cloud. Inevitably you're going to fail in the first year if you do that," said Nathan McBride, vice president of IT and chief cloud architect at Lexington, Mass.-based AMAG Pharmaceuticals Inc. "You need to spend more before you can stop spending."

McBride said customers often have more negotiating power with cloud service providers than they think, citing a Software as a Service vendor he works with who took his advice when McBride felt the vendor's prices were actually too low.

"I would prefer that they actually charge me more so that I can ensure that I have their business for some time," McBride said.

However, some industry watchers predict that this relative indifference to pricing changes won't last forever -- provided cloud migration problems are reduced by emerging technologies.

"As there are more cloud providers, as feature sets become more uniform, as deployment automation becomes more established and it's easier to move between cloud providers, I think cost optimization is going to become a much bigger deal," said Jared Reimer, co-founder of Cascadeo Corp., an IT consulting firm located in Mercer Island, Wash.

But right now, according to Reimer, it's a bit early.

"For midscale companies, it's a secondary concern right now," he said. "There's just too much else to do."

Amazon, Rackspace price war rages on

"I think it's a very nice marketing stunt, PR stunt," said ProfitBricks chief marketing officer Andreas Gauger of the back-and-forth between Rackspace and Amazon in a separate interview. "It's shadowboxing between big companies that are happy with their high margins."

Given the cost of hardware and other data center services, Gauger said that, in particular, Amazon's claim that AWS operates at "razor-thin margins" is false; in his blog post, Gauger estimated the rival company's margins at somewhere between 60% and 80%.

"If I were to sell our product at the same prices as Amazon or Rackspace does, I would have gross margins far higher than the quoted 60% to 80%," he wrote.

Amazon declined to comment on competitors or state what its gross margins are. Rackspace did not comment as of press time.

Beth Pariseau is senior news writer for SearchCloudComputing. Write to her at or follow @PariseauTT on Twitter.

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