Amazon Web Services (AWS), with its ‘Walmartesque’ everyday low prices strategy, has single handedly altered the enterprise software pricing model and has created the most important deflationary impact of this century.
The ‘old tech’ business model was to dominate an industry and then release mediocre upgrades at commensurate pricing points and with minimal worthwhile innovation. The ‘new tech’ model is to undercut the competition with material value added lower cost upgrades, which is exactly what AWS is doing. Amazon’s low cost strategy has influenced many technology companies to also cut prices for their platform solutions, including Microsoft with its competing web platform, Azure, as well as Google Compute. In fact, you could argue that Windows 10 will be free for many users initially because of Amazon’s influence.
We are being conditioned to expect to pay nothing or next to nothing for operating system platforms. I can’t think of a more deflationary secular trend.
There are so many intriguing free Internet software products available now because of Amazon and there are no historical industry vertical precedents. The optimist in me believes that interest rates are low in part due to the deflationary impact of Amazon Web Services (AWS), and that the impact of low cost cloud platform computing will cause many verticals and software companies to cut prices in the years ahead and, hence, cause interest rates to remain close to historically low levels. AWS in 2015 is this generation’s 1989 Berlin Wall tear down deflationary economic event.
Today, enterprise applications and operating system prices are plummeting thanks to Amazon acting as a price cut leader. This deflationary trend has started to accelerate as Microsoft and Google have started to also be price cut leaders by materially cutting the pricing points of their cloud service provider platforms, which are the platforms that some of the most disruptive companies in the world operate on top of. New companies are being created like Uber that charge much lower pricing points due to the inherent cost savings of low cost cloud platform solutions like AWS. This deflationary trend should continue for the foreseeable future. Many disruptive new companies don’t use any software from old school tech companies like Oracle or Microsoft as there are widely available free (or lower cost) alternatives that run entirely on AWS. As a result, as consumers, we have so many opportunities to use technology products that now cost next to nothing to use or subscribe to (i.e., Netflix).
Why was the global economy booming in the ‘90s? It wasn’t primarily because of the booming tech sector. Rather, it was mainly because the Berlin Wall fell in 1989 and a plethora of lower-cost, high-quality labor was unleashed from Eastern Europe; this was the reason we had low interest rates then, relative to the booming global economy.
AWS is today’s equivalent. And the technology cost savings we’re seeing today are commensurate with the deflationary labor cost savings in that era. Instead of the late, great Ronald Reagan prophetically telling Mr. Gorbachov to “Tear down this wall,” Amazon has forced the entire enterprise software market to dramatically reduce prices around the walled garden of ridiculously high-margin software prices. Only it was Jeff Bezos telling Mr. Ballmer in 2005, when AWS was released, to “Tear down this wall.” The deflationary impacts are remarkably similar.
How is AWS deflationary? Your monthly cable bill is now more than 50 percent cheaper. Your hotel fees are more than 50 percent cheaper. Your server computing bill is more than 50 percent cheaper. The IT cost to start a business is now more than 50 percent cheaper. The list goes on.
Netflix is profitable and is dirt cheap at only $7.99 per month, with superb proprietary content, because Netflix runs on AWS. AirBnB allows us to pay next to nothing for hotels because AirBnB runs on AWS. Dropbox has cut our company’s server costs by more than 50 percent because it runs on AWS. As AWS continues to materially cut the pricing point of its platform and applications, we can expect more companies to cut prices and/or new companies to emerge that compete with, and materially disrupt, old school companies that have dominated their respective industries for decades. It’s astonishing how much better Netflix’s content is today versus a decade ago when its pricing point was much higher; thanks in large part to Netflix running on AWS.
Under Ballmer, Microsoft only cut the price point of Windows three times since it was launched more than 20 years ago. By contrast, Bezos has cut the price point of AWS close to an astonishing 50 times in less than 10 years.
But now, under new CEO Satya Nadella, Microsoft’s competing product to AWS, Microsoft Azure, is not just a price cut follower, but also a price cut leader. Google’s superb cloud platform, Google Compute, is also now a price cut leader. We have three unbelievable cloud service providers all aggressively cutting prices.
These platforms are the most important cloud operating systems and, thanks to AWS, the deflationary impact of the aforementioned platform price cuts is staggering and unprecedented. This is not an irrational exuberance event.
There is no historical deflationary precedent in any other industry. The impact is commensurate with Ford, GM, and Toyota cutting prices on cars 50 times in 10 years. Or Marriott, Holiday Inn, and Ramada cutting hotel prices 50 times in 10 years. Or General Electric, Sub-Zero, and Maytag cutting prices on their appliances 50 times in 10 years.
In the past, companies were slaves to the enterprise software giants with their “one neck to choke” strategy. Conglomerates like Oracle, with their patched together acquired vertical offerings from the hardware layer (Sun Microsystems), to the middleware layer (BEA) to the enterprise resource planning layer (PeopleSoft and others), would charge hefty annual maintenance fees. Never again. AWS and lower priced deflationary cloud computing options have finally disrupted this model. In the years ahead, we will continue to see cloud service provider platform giants like Amazon, Microsoft, and Google continue to cut prices, furthering the most deflationary event we have seen since that historic event in 1989.
Chris Haroun is a partner at VC firm ARTIS Ventures.