The Race to Zero: Amazon and the Battle for Cloud Services Market Share

Money may not be able to buy you love, but it can definitely capture market share. And once you have that, you can starve the competition to death.

That appears to be the tactic that Amazon is pursuing when it comes to The Cloud.

The challenge facing all entrants in that business, from IBM to feisty startups, is that there is too much competition. When that happens, everyone cuts prices in order to win what they hope will be enough orders to keep the doors open until the weaker competitors can no longer sustain the losses. Hence the Race to Zero, meaning zero profits.

The really big problem in this business is that one of the competitors, Amazon, is bigger, richer and more ruthless than everyone else. Amazon has already signaled its disdain for Wall Street's priorities by repeatedly making it clear that stock price is but one metric among many it follows and that investing in the long term strength of the business is its primary objective. This often means funding services that improve customer response and hence satisfaction but are not immediately profitable.

And, given its investment in The Cloud, it means taking losses, if necessary, to secure its leading market position. If there is going to be a winner of the Race to Zero, it is likely to be Amazon. But no one else should despair, the losers can sell their figurative second, third and fourth place finish medals on Amazon when they're ready. JL

Julie Bort reports in Business Insider:

There's so much competition in the cloud industry that cloud companies keep cutting their prices, even while they increase their storage limits.
Cloud computing has completely changed the tech industry, but it has a dark side for the companies competing in the market, something those in the industry call "the race to zero."
There's so much competition in the cloud industry that cloud companies keep cutting their prices, even while they increase their storage limits.
There are a couple of reasons for this. For one, computer storage keeps getting cheaper. A gigabyte's worth of storage on a hard drive in 1993 cost more than $9,000, but it cost a mere 4 cents in 2013.
But you can really thank Amazon for making sure that cloud computing companies pass those savings along to customers. As its costs drop, Amazon cuts its prices for its cloud. Amazon Web Services had 45 price cuts in about the past six years, it says, thanks to a culture of "frugality."
Amazon is increasing revenue by gaining more customers and adding ever more services for which the customers are willing to pay, even though those customers pay less for each as time goes on.
The company is treating computer services like a retail store. You are more likely to stock up your cart with more stuff if you are getting a bargain on every item you buy.
Microsoft and Google have vowed to keep matching Amazon's prices while beefing up their selection of services.
And that means the whole cloud industry has to cut prices as time goes on, not raise them.
Aaron Levie, CEO of the cloud storage company Box just told The Information, "We see a future where storage is free and infinite."
That's great news for those of us with a growing stash of documents, photos, and smartphone videos.
But it also means that companies like Box, Dropbox, Google, Microsoft, HP, IBM, and others have to come up with unique cloud services that people are willing to pay for.
For instance, Microsoft and Google have put Office apps in the cloud, and they toss in the cloud storage as part of that.
Box, which still hopes to go public one day, is doing a similar sort of thing. It offers extra security around files, something enterprises are willing to pay for to make sure they comply with all laws.
Box is also building other applications, things like a project management app. That's like a GitHub for documents, where all the files for the same project live in one place and people can collaborate, or a sales portal that lets salespeople see which customer has been given which bit of marketing materials.
Meanwhile, every new company in the cloud-computing war is looking for ways to offer special services beyond renting apps or storing files.
When Cisco announced it would spend $1 billion on the cloud last summer, the executive leading the project, Nick Earle, was quick to declare, "Our strategy is not to follow AWS on the race to zero."
All the big players have declared much the same thing as they spending billions on their clouds: IBM, HP, Oracle.
But when push comes to shove, the price war is on, and Amazon is determined to keep it on.