Can Cloud Storage Costs Fall to Zero?

Tuesday Aug 5th 2014 by Paul Rubens
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Cloud storage providers keep lowering their prices. How low can they go?

Cloud storage prices have plummeted over the last few years thanks to an ongoing price war between storage service providers.

And considerable barriers to cloud storage adoption by enterprises – security concerns, fears about letting data out of the organization, regulatory worries  – have largely been overcome.

As a result of these falling online storage prices and decrease in barriers to adoption – at least in part – 36% of all data is forecast to be stored in the cloud by 2016, compared to just 7% in 2013, according to Cirrus Files

So an important question to ask is this: how low can cloud storage prices go?

Can they fall to zero?

It's an important question for enterprises considering purchasing new on-premise storage systems, either to replace existing systems or to provide additional storage capacity for the huge volumes of data that many organizations are now amassing. And it's an important question, too, for the traditional storage vendors themselves, who find themselves being undercut by cloud storage providers.

Race to the Bottom

First of all, let's look at the price of cloud storage today. If you are looking for archive storage for data that will rarely, if ever, be accessed, you can pay as little as 1c per gigabyte per month for Amazon's Glacier storage service. Prices for standard storage on its S3 platform are slightly higher at 2.75c per Gigabyte per month for large storage volumes. Google's cloud storage prices are roughly the same, at 2.6c per Gb per month. Microsoft's Azure storage is priced at a similar level, although the structure is more complex.

Other storage offerings are apparently free.  For example, Microsoft currently offers 15Gb of free storage on its OneDrive  cloud service, as does Google with its cloud services. Box offers 10Gb, and the soon to be launched Apple iCloud Drive will offer 5Gb.  

But it's worth remembering that someone is paying for this storage, and in these cases the cost is probably coming out of  each company's marketing budgets, because these relatively small free storage allocations are designed to hook sufficient numbers of customers into paying for additional storage for it to be worthwhile to offer free trials.

The important point here is that the cost to providers of providing storage resources is higher than zero. There's the costs of hard drives (or whatever medium is used to actually store data) plus the cost of powering, housing and managing them, and so on. That means cloud storage offered by itself can never be completely free. Free samples? Yes. Free service? It's simply unsustainable.

What's more debatable is whether there is a significant marginal cost to providers for storage. Put another way, once a large scale cloud storage provider like Amazon or Google is up and running, does it cost anything to allow a customer to use one more small unit of storage?

It's an important question to consider because the answer has a profound effect on the economics of cloud storage provision.

An example of a business with zero marginal costs would be something like satellite television or radio broadcasting. Once the infrastructure is in place, it costs no more to provide service to one million customers than it does to one million and one.

At the other end of the scale is something like a business that develops custom applications for individual customers. Supplying each additional customer with an application developed specifically for that customer's needs will involve a large amount of work, so the marginal cost is high.

Cloud storage provision lies somewhere between these two extremes, similar to businesses that provide Internet or cellular data services. That's because there is a high initial infrastructure cost, but once a pool of storage (or data bandwidth) is in place then the marginal cost of providing  the service to one more customer is low – until the provider runs out of capacity. At that point the provider has to make another sizable investment (in storage media, or network switches and other infrastructure), and then the marginal cost goes back down again.

What we can learn from the Internet service provider or cellular data businesses is that those services are not provided free (although there may be free promotions, analogous to the free storage that some cloud storage providers offer as a marketing exercise). But they are very often offered at a fixed, all-you-can-eat price. Internet services in particular are usually priced this way.

(While cellular data plans have been offered this way in the past, they are now frequently offered with data caps or fair use policies. Fair use policies get a lot of bad press, but essentially they are designed to prevent plans that offer unlimited service for a fixed price from altering users' behavior to take advantage of the free resource.)

What's all this got to with cloud storage provision? It tells us that while cloud storage is never likely to be offered by itself free, it is likely that unlimited storage will be offered  for a flat monthly fee as well, instead of being offered  on a pay-monthly-for-what-you-use basis (as is currently the case.)

That may sound unlikely, but don't forget that that's what  happens with data service provision. And in fact it is already happening with storage provision: for example Google Drive for Work offers subscribers unlimited storage for their data for a flat fee of $10 per month. And Box also offers unlimited storage for its Enterprise and Business subscribers for a flat monthly fee starting at $15 per month.

These examples are interesting for two reasons. Firstly, there is no obvious need for a fair use policy: subscribers are unlikely to store Exabytes of data because the data they store is business app data – documents, spreadsheets, and that kind of thing. That's very different from vast troves of data from all kinds of sources that many companies would like to store and use for Big Data analysis purposes – and which are unlikely to be stored in Google Drive for Work or Box.

And secondly, these unlimited storage offerings are part of other services which customers pay for.  "Box is often referred to as a storage company, [but it is] really a SaaS company that happens to have storage," says Mark Peters, senior analyst at Enterprise Strategy Group. "The value is in the application – streamlining sharing and collaboration across the knowledge worker ecosystem of collaborators and devices. The more people (and therefore data) you get into your ecosystem the stickier this scenario becomes for the provider – because there might now be a commensurate increase in enterprise licensing fees to balance the increased demand for ‘free’ storage, and for the users - because migration costs become painful,” he says.

"So free storage is good for the provider as it compels usage, and can lead to an inability to go elsewhere, even if the ‘free’ starts to cost sometimes," he adds.

That's significant because it provides a clue to how storage may well be offered in the future: as a resource given away for free  – but only to subscribers of the provider's other services.

What kinds of services? The obvious candidate is cloud computing services, which also just happen to be offered by storage service providers. The likes of Amazon, Google and Microsoft have huge Infrastructure-as-a Service and Platform-as-a Service offerings. And as another way of differentiating their services there's no reason why they shouldn't offer unlimited cloud storage to customers  for free. Peters suggests services such as backup, file sharing and analytics as other examples of these extra services.

Henry Baltazar, a senior analyst at Forrester Research,  concurs. "The reason Google, Amazon, Microsoft, and other providers are dropping cloud storage prices and in some cases making it unlimited is because these vendors don't want to make their money on storage. 'You own the data, you own the customer,'" he says . "They want to sell compute, analytics, security, collaboration, developer service, and so on to customers - and all of these things are high margin.”

He continues: "None of these players have a legacy enterprise array business to protect, so every dollar they carve out of that can go to other cloud services."

Baltazar does point out, though, that the type of storage that's likely to be offered free is object storage for unstructured data. High performance cloud storage – the type you need to actually run apps – is not cheap, although the amount needed is far more limited than the amount you may want to use to store unstructured data. "If anything, that the block storage options like Amazon EBS with provisioned IOPS are rising as the providers add more flash to options and charge more for higher guaranteed performance," he says.

There is the danger that offering unlimited free storage would distort customers' behavior, encouraging them to store far more data than they would if they had to pay per gigabyte, of course. But this is mitigated by the fact that moving large amounts of data to and from the cloud is a time consuming business that can affect the performance of corporate WAN links – and cloud providers can and do charge transport costs for moving data out of the cloud.  In Amazon's case this amounts to about 10c per terabyte for network egress.

"It is expensive to pull data out or push it to another cloud," says Baltazar. "There are some efforts with data center providers like Equinix to connect clouds that are located within their data centers, but more work needs to be done. Until then, providers have a solid lock in on customers."

These factors mean that if providers do offer free unlimited storage that they might not have to impose fair use policies or other terms to prevent the free storage being exploited in ways that were not originally intended.

So as enterprise storage requirements increase, the good news is that the prospect of free storage is certainly on the horizon. But since storage has a cost it will never be truly free: you'll still be paying the storage provider for something, even if it isn't billed as storage.

When it comes to storage, in other words, there is unlikely ever to be such a thing as a truly free lunch.

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