The Business of IT

Cloud pricing wrinkles and tea in China

As you’ve probably heard, Amazon Web Services reduced their on-demand cloud prices significantly last week. You’d think customers would be happy across the board, but that’s not the case. Here’s why, and what will happen as a result.

As discussed previously, AWS customers translate their capacity planning into Reserved Instance purchases, based on the relative savings these RIs provide over on-demand prices. But, when on-demand prices are reduced without a corresponding reduction in the instance-hour price for RIs – as happened last week – the RI breakeven point shifts and upsets the optimal RI coverage calculus. AWS customers who purchased RIs before the price reduction can find themselves stuck with inventory that now costs more per hour, in amortized terms, than the cost if they had not purchased the RI. I have several clients in this situation, and none are very happy about it.

Tea in China

I can imagine the counterargument to this thinking, no doubt coming from the mouth of a cool-headed economist: If the customer was happy when she bought tea at a 10% discount, why should she be any less happy when the price is further reduced a day or a week later? She deemed the value of the tea to be worth the cost when she bought it, and that value has not changed. By rational reasoning, she should be equally satisfied today.

But people don’t think purely in economic terms – emotions play a part in their decisions as well. And the AWS customers who are feeling unloved by this price reduction are the very customers, I imagine, that AWS wants to keep most: These customers have made long-term commitments to AWS already. So, it won’t be long until we hear another price reduction announcement from AWS, specifically directed at this customer segment. Don’t be surprised to see AWS granting a proportional hourly price reduction – or an equivalent credit – for already-purchased reserved instances.

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