This is part 3 of my series on pricing in the cloud.
Do you think IaaS cloud prices are due for another reduction or will they remain at current levels for now? Regardless of which answer you or I would give to this question, ours is just a guess - because we have no data to support either decision (unless you work at an IaaS cloud provider of course). What we do know for a fact though is that when a cloud provider contemplates a price reduction, they should definitely consider possibility of triggering a “run” on their own cloud.
A run on the cloud can be looked at as somewhat similar to a bank run. The topic of bank runs in the context of IaaS cloud computing was first (to my knowledge) brought up by Simon Wardley in his recent blog post. I recommend that you read his post first, and then continue here.
Fundamentally, a bank run is about customers losing faith in the institution’s ability to deliver on its promises in the future. For an actual bank, this promise is that your money is safe and that you can withdraw it at any time, whenever you need it. When some customers get nervous and withdraw their deposits, others see their actions and might get nervous too. Additionally, because bank keeps only a fraction of its deposits in reserve, the longer one waits, the less likely one will be able to get money on first request. These two phenomena lead to a domino effect that gains momentum very rapidly and is usually quite difficult to stop.
For an IaaS cloud, in this context, the promise is that if and when you need more capacity for your application (usually in the form of more cloud instances), you will be able to provision it.
What happens when a price for cloud compute capacity is reduced? Because demand curve usually slopes downwards, it means that the lower the prices, the more units (cloud instances) will be demanded and consumed. As a result, assuming overall supply remains constant, availability of instances in the future will inevitably decrease.
Here is a hypothetical situation. Try to imagine what you’d do if you were no longer confident that you’d be able to get more instances when your application ends up on the front page of Techmeme. (Note that it’s not important what could trigger the original loss of faith - maybe you would hear something at a user group meeting, maybe on Twitter, maybe on forums. A run could start due to a rumor which doesn’t even have to be true, it just has to be believed by sufficient number of people). Some might leave the cloud which is not a good outcome for provider, but will not lead to a run.
Much more importantly, others might start hoarding instances - launching more instances than actually needed, just in case a need comes up in the future. The more hoarding by some, the more likely others will run into same problem and may resort to hoarding themselves, and so on and so forth. The more hoarding is happening overall, the less “on demand” a cloud provider will become.
Am I saying that a cloud run is imminent? Of course not, in fact I am confident it’s not going to happen, because providers have usage data and can predict usage patterns with high degree with confidence. But this once again emphasizes importance of pricing in IaaS cloud computing. It’s also an illustration that a provider may not be in a position to set prices solely based on its costs or competetive pressure - there is a third powerful force that will not let prices drop too low.