Amazon.com Inc. (AMZN - Free Report) recently announced its decision to slash prices of dedicated instances on its cloud-computing platform.
Dedicated Instances are EC2 instances that run on single-tenant hardware dedicated to a single customer account. They are well suited for running workloads that have to be isolated at the hardware-level from instances belonging to other customers due to corporate policies or industry regulations.
The decision to slash prices by upto 80% for some of its online data services will help Amazon to maintain its dominance in the cloud computing field. The significant price cut follows a chain of reductions that Amazon Web Services (AWS) has introduced over the years. Management stated that the new prices will be effective from Jul 1 and will apply to all supported instance types and AWS regions.
We view Amazon’s decision to cut prices as an aggressive move, designed to increase its share in the cloud computing market. Last year, AWS generated about $1.8 billion in revenues and is expected to grow stronger given the increased adoption of its cloud services.
This year, AWS price cuts have fuelled a price war, with Google (GOOG - Free Report) and Microsoft (MSFT - Free Report) also joining in. In April, Microsoft slashed prices for its Windows Azure cloud services by 21% to 33% for some of its online data services.
Cloud storage came into prominence in 2009, with Nirvanix and Amazon's Simple Storage Service (S3) being two of the major pioneers. Since then, Amazon has continued to dominate the space, with other players like Rackspace and Microsoft offering their own solutions.
We believe the cut in Amazon’s AWS dedicated EC2 offerings indicates difficult times ahead for other companies in the space. Following the price cut, shares of Rackspace were down almost 8% to $38.93.
Earlier, companies incurred significant costs to build their own infrastructure for data storage. They had to make a substantial payment upfront, after which they would invest further to purchase additional storage space, anticipating growing backup demand. This resulted in under-utilized capacity and unnecessary expenses. With Amazon’s cloud-based storage services, companies now do not need to waste time and money on managing their own data centers.
IDC predicts that the cloud market will jump 130%, reaching $43.0 billion in 2016. Further, Gartner predicts that around $677.0 billion would be spent on cloud services within the 2013–2016 timeframe. Microsoft, with its solid portfolio should be able to tap this opportunity.
The company is expanding AWS internationally and investing heavily in technology infrastructure to support rapid growth. We remain extremely positive about AWS’s growth prospects and expect Amazon to remain one of the leading players in the fast-growing ecommerce market.
Amazon shares currently retain a Zacks Rank #3 (Hold).