If you’re late to the cloud, now may not be the best time to get in, investing-wise. While plenty of technology-forward companies have had phenomenal rises based on skyrocketing demand for cloud services and infrastructure, the growth of the industry may be held back by a price war. Tech giants with skin in the game are slashing prices by massive amounts, making it better than ever for users of cloud services, but putting into question the future profitability of basic cloud-service providing. Are your cloud investments safe?
The players
Amazon.com, Inc. (NASDAQ:AMZN) Web Services announced earlier last week that its EC2 Dedicated Instances (how’s that for jargon?) would now be available to clients for up to 80% off current prices. The big discount (80%) goes to dedicated per region fees, whereas dedicated on-demand instances get up to a 37% discount, and dedicated reserve instances get up to a 57% discount. If you don’t know what any of those words mean, it’s OK. The bottom line is that Amazon.com, Inc. (NASDAQ:AMZN)’s AWS just got substantially cheaper.
As VentureBeat reported, Google Inc (NASDAQ:GOOG) just last month cut some of its enterprise cloud services by 25%, and Microsoft Corporation (NASDAQ:MSFT)-owned Azure — a new player in the infrastructure cloud market as of April — has cut its prices 21%-33% to even the playing field with the other giants.
The industry, obviously, is growing at incredible rates and will continue to do so for some time, but will the pricing pressure cripple companies’ profit potential?
Undersold!
Amazon.com, Inc. (NASDAQ:AMZN), Google Inc (NASDAQ:GOOG), and Microsoft Corporation (NASDAQ:MSFT) all have the ability to hold prices as low as possible, and for shareholders, you likely won’t see any materially negative consequence. But there are losers in this story: pure-play cloud companies.
Rackspace Hosting, Inc. (NYSE:RAX) got slammed in early May after missing analyst estimates. The miss was relatively minor, and normally shouldn’t concern investors, but it was management’s comments that did the damage.
In February, Rackspace Hosting, Inc. (NYSE:RAX) slashed its prices to compete with all three companies mentioned above, and the effort to hold or gain market share simply could not overcome the pressures put on the company’s margins. Some believe Rackspace’s current trajectory is wholly unsustainable, as it will never compete with the likes of AWS and live to tell the tale. Rackspace does hold value in its distributed infrastructure, it just needs to find new ways of leveraging that.
The bottom line is, the cloud price war is unappealing for all, but it will not spell trouble for the 800-pound gorillas. If your portfolio is full of pure-play enterprise cloud providers, though, take a close look at your picks and don’t rule out an exit.
The article Cloud Price Wars Could Slam Your Portfolio originally appeared on Fool.com and is written by Michael Lewis.
Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google, and Rackspace Hosting (NYSE:RAX). The Motley Fool owns shares of Amazon.com, Google, and Microsoft.
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