The future of corporate computing are warring over by three major cloudl service providers, Amazon, Microsoft and Google. As, the three major service providers are battling over the future of corporate computing, and companies that use their services are reaping the benefits.
Mr. Simonsen, chief executive of real-estate startup Altos Research, rents computing horsepower and data storage from Amazon to crunch data on about 100 million U.S. home listings. Three weeks ago, Amazon cut Altos's bill nearly in half. That enabled Mr. Simonsen to add two programmers to develop new services.
"Nobody ever gives you a 40% price break overnight," Mr. Simonsen says. "Our direct benefit is the opportunity to create more products, faster."
Amazon's eight-year-old business, called Amazon Web Services, pioneered the notion of leasing computing power, sparing companies the costs of building their own computing backbone. So far, it has primarily appealed to small firms like Altos.
Microsoft and Google recently bolstered their own offerings, sparking a three-way price war. Within days last month, each company cut prices on various services by up to 85%.
That is changing the math for corporate executives who spend roughly $140 billion a year to buy computers, Internet cables, software and other gear for corporate-technology nerve centers.
The tussle will determine how companies orchestrate the computing that runs their businesses, and it threatens the makers of traditional computing-center equipment such as International Business Machines Corp. IBM , Hewlett-Packard Co. and EMC Corp. A spokesman said IBM offers both outsourced computing services and "higher-margin software." H-P executive Bill Hilf said it is focused on helping organizations modernize their computing backbones to own, rent or a mix. EMC president Jeremy Burton said its sales are growing quickly to providers of Web-friendly computing.
The price war is already delaying the day of reckoning for companies that thought they would one day own their own computing centers.
Marketing-technology firm Krux Inc. has used Amazon's computers to personalize information or ads on customers' websites since it started four years ago. These days CEO Tom Chavez says the company sifts through 160,000 pieces of data a second. He figured Krux would need its own corporate-computing hubs once 750 million Web surfers encountered its technology each month. But it's now at more than double that level, and Mr. Chavez says he isn't planning a move anytime soon.
"These latest price wars among the big guys are sure to postpone it even further, which is terrific for my business," Mr. Chavez says. He is also looking at Microsoft's computing-rental offering, called Azure. Mr. Chavez estimates Krux would spend five or six times as much on people and equipment to operate its own computing infrastructure.
In all, researcher Gartner Inc. estimates companies will spend $13.3 billion this year on pay-as-you-go computing horsepower from Amazon and others, up 45% from a year ago. That's still less than 10% of the total spending on corporate computing centers.
Amazon is by far the biggest player, with revenue last year of more than $3 billion, up 85% from a year earlier, according to Bernstein Research, which calculates its figures differently than Gartner. Bernstein estimates that Microsoft and Google each pulled in several hundred million dollars from their offerings. None of the companies discloses the actual figure.
Behind the growth are big savings. A medium-sized website with about 50 million page views a month might spend about $1,200 a month to buy two computer servers, hardware to push data to the Web and other gear, according to calculations by Simon Margolis at technology-consulting firm SADA Systems. The same company might pay roughly $270 to $530 to rent equivalent computing power from Amazon, Microsoft or Google, he says.
Consultants say such savings are tempting some bigger companies to rent, rather than own, more of their computing power. Already, about 87% of technology executives say they use an outsourced computing provider for at least one task, according to a recent survey by consultant RightScale Inc. But it's rare for a large company—Netflix Inc. is the most cited example—to operate primarily this way.
Matt Gerber, an executive vice president of 2nd Watch Inc., which helps big companies use Amazon's rental offering, says a large consumer-products firm that has been renting Amazon computing power for minor needs, such as marketing websites, is preparing to move more core-computing functions to Amazon from its own network. He declines to name the company.
"The cost models [clients have] done have all gone out the window" because of the price cuts, says Sebastian Stadil, founder of Scalr Inc., which helps companies manage their computing backbone. Mr. Stadil says an Internet firm that his company works with is considering moving some workloads to Google's Compute Engine because of the recent price cuts and a new policy that applies discounts without requiring a service contract.
There are obstacles to the rental model that may limit growth. It's often cheaper and more reliable for large companies, especially those with predictable computing needs, to own or control their own computing backbone. Companies also often have to rework many of their older software programs to run on another company's computers.
In highly regulated industries such as health care, companies often want to keep sensitive digital information on their own computers. Recent revelations about U.S. government surveillance programs have also made customers of outsourced computing providers ask tougher questions about the data's security, according to technology vendors and customers.
Some companies, including Comcast Corp., try to blend the approaches, applying Amazon's techniques on their own computing centers. Forrester Research says that about a third of the big companies it surveyed last year had created an Amazon style of pay-per-use technology on computing hubs they owned.
In the rental business, the heightened competition is prompting some customers to switch vendors. CliQr Technologies, which helps companies calculate the costs of their computing needs, says more customers in the last year have jumped from one outsourcing provider to another, particularly after Google revamped its offerings.
Thermopylae Sciences & Technology, an Arlington, Va., digital-mapping company, has been renting computing power from Amazon and was eager to try Google, but the service wasn't quite ready, says Michael Cachine Sr., chief information officer.
Since Google changed its offerings, however, Thermopylae has used Google's service to build software that handles employee-performance reviews and lets workers enter their personal information for colleagues to see. "As soon as the gate opened, we started building," Mr. Cachine says.
Report from WSJ.com.