How cloud pricing war will affect PLM?

How cloud pricing war will affect PLM?

plm-and-cloud-price-war

Large infrastructure cloud providers are slashing prices. TechCrunch article Nobody Can Win The Cloud Pricing Wars is providing some additional details about the situation. The same article speaks about the moment when CIOs won’t be able to ignore the pricing advantage:

Earlier this week, Google lowered prices 10 percent across the board on their Google Compute Engine cloud platform . The cost is getting so low, it’s almost trivial for anyone to absorb the costs of running infrastructure in the cloud, but you have to wonder as the cloud pricing wars continue, how low can they go and if it’s a war anyone can win.

In spite of the low prices, there are still plenty of companies talking about the cloud with disdain and fear, but the fact is how long can CIOs ignore pricing as it goes this low? It doesn’t make good business sense, and whatever risks a large enterprise believe they might face with cloud services, it has to be offset by the plunging costs.

Are you confused by comparison of cloud infrastructure prices? You are not along. GigaOM article provides one easy chart that will help you to demystify cloud prices.

RBC’s formula condenses cloud services into one unit price based on “total spend per GB of RAM,” which includes storage, compute, memory, I/O and other base features. That makes it easier to compare cloud pricing across vendors. Per a research note from RBC analyst Jonathan Atkin this week, the second half of 2014 saw less price cutting than the first half — which included a round robin of competitive cuts from Google, Amazon and Microsoft in March. 

RBC-cloud-price-per-GB-RAM1

The devil is in details and I’m obviously interested to see how it will impact (or not) PLM vendors. When it comes to “cloud”, not all PLM vendors are the same. While most of them are publicly announced cloud strategy, the diversity of cloud solutions is pretty much high – public cloud platform, leveraging IaaS cloud layer and developing of colo-hosting solutions.

It is important to see business aspects of cloud PLM. Thomasnet article by Verfi Ogewell PLM Market Faces Challenges, Hints at Possibilities provides an interesting perspective on PLM market and impact cloud PLM created. Read the following passage:

One problem in assessing PLM investments for 2013 and beyond has to do with the changing licensing models, a matter which to some extent is connected to merging technology platforms, like the cloud. Increasingly, vendors are moving from paid-up licensing models to subscription models. Paid-up models have annual maintenance fees in the range of 18 to 22 percent of the license purchase price. Subscription models demand payment each year that is in the range of 30 to 40 percent of today’s list software pricing.

Has the hype around PLM in the cloud resulted in customer investments? So far, the answer is no. In fact, it may be the other way around. The cloud has affected the pricing and results on the on-premise market negatively, plus, while many PLM vendors have offerings, most have yet to see any real returns on their investments. Meanwhile, the discussion of SaaS (software-as-a-service) has created expectations of at least more effective pricing models. This picture may change quickly if the new business models for delivery and support of PLM act as triggers for greater investments.

So, what will cloud infrastructure price drop means for PLM vendors? My hunch, this is a good news for PLM vendors hosting their solution on IaaS infrastructure. This is very costly option, especially with existing “on-premise” single tenant PLM architecture. Lower price will allow to PLM vendor to adjust their expenses. It can be even more beneficial for vendors building optimized cloud PLM multi-tenant architecture. However, it probably won’t impact vendors focusing on private and hybrid cloud infrastructure. While regardless on PLM architecture, 50% of PLM project is services cost provided by vendors and implementers, the overall impact of infrastructure cost will have less impact.

What is my conclusion? Cloud pricing war will impact customer mindset. It will increase customer demand to lower cost of PLM solutions. It will shift CIO’s perspective on how to leverage cloud infrastructure in their business. Low cloud infrastructure cost won’t make cloud PLM software free tomorrow. At the same time, it will help PLM vendors to adjust overall cost of PLM services and implementations. Better architecture of cloud PLM solutions will help vendors leverage offsets in infrastructure cost to bring more cost effective PLM cloud services. Just my thoughts…

Best, Oleg

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  • One reason the cost of cloud is dropping is because the cost of network infrastructure is low. A little history, Google has been buying up so called ‘dark fiber’ since as early as 2005. Dark fiber is fiber optic cabling that has been installed but is not actively being used (no data is being transferred over it, so it is ‘dark’). During the Dot-com and Telecom booms of the late 1990’s, many telecommunications companies built out extensive networks of fiber, expecting the market to keep growing at an exponential rate. With the burst of the dot-com bubble and new technology that increased the amount of bandwidth that could be transferred on a single wire, the market for fiber collapsed (along with some large companies like Global Crossing and Worldcom declaring bankruptcy). Much of it lay dormant for years before Google started buying it in large quantities at very low prices. Google used to have to use Telecom companies to move data between data centers at hefty fees. Now the cost to move data is almost zero.

  • beyondplm

    Dana, I think you are right and cost of infrastructure is dropping. However, the case of enterprise software is different. This is what we call – value sell. It is less about cost and more about value prop. It will be interesting to see how to models are colliding in the future.

  • The cloud pricing war will transition to a different front – as the storage itself becomes commoditized, focus will be on differentiators and value-adds. We’re already seeing this in the consumer storage market and the same will likely happen with enterprise – some interesting partnerships or M&A may rise from this transition.

    As for PLM cloud not producing significant returns there are two factors here: 1. the geologic time scale at which PLM is adopted by the significant customers and 2. Most (but not all) PLM offerings to date aren’t new approaches designed with cloud in mind, but existing platforms with the backend swapped out. The value proposition for that is low. It’s going to take next gen capability to entice people over especially considering that many traditional PLM strongholds (like aerospace) for various reasons (both legitimate and imagined) aren’t so keen on the whole cloud thing just yet.

  • beyondplm

    Ed,
    Thanks for your comment!

    1-agree completely with you about “value-add” on top of commodity of cloud storage.

    2- For most of PLM vendors “cloud” today is a way to reduce upfront cost. You still need to implement it as well as find a way for people in an organization to adopt it.

    Oleg