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Ajit Gupta – How to Compete on Price Without Sacrificing Profitability | WSJ

The enterprise cloud market is locked in an old-fashioned price war. Until recently, Amazon has owned the market, but Google, never one to take a backseat, is attempting to snatch away Amazon market share by lowering prices. Amazon has responded by slashing its prices by as much as 40%.

Large companies like Amazon, Google, and Microsoft have the resources necessary to treat basic cloud services as loss leaders, but what is their longer term strategy? I doubt they’ll continue to lose money without trying to lock customers into walled-off, vendor-specific cloud ecosystems.

Smaller cloud companies don’t have the luxury of selling cloud services at a loss, but if they can’t hold their own during this price war, de facto cloud monopolies will emerge, eventually limiting choices and driving prices back up.

Avoid This Price War

Consider what is happening with Rackspace. The company was a stock market darling a year or so ago, seen as a serious competitor to Amazon and Google. Then, it released its Q4 2013 earnings, which were down 30% from Q4 2012. Predictably, investors hammered them. However, when Rackspace bounced back strongly with its Q1 2014 earnings, analysts and to a lesser extent investors were still skeptical. Why? Commodity pricing.

Rackspace doesn’t have the resources to beat the likes of Amazon on price alone, especially since Amazon has made an art out of losing money in various market sectors while its stock price simultaneously climbs.

Competing on price is a sucker’s game for all but the biggest organizations, behemoths who cannot just survive but also thrive on razor-thin margins.

 

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Ajit Gupta: How to Compete on Price Without Sacrificing Profitability – The Accelerators – WSJ.

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