Can Cloud Storage Costs Fall to Zero?


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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.

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