With downward price pressures, the excess capacity that providers must have on hand for peak traffic becomes a drag on profits. After the cloud gold-rush era is over, providers will need to find ways to turn that cost center into a profit center. Otherwise, they'll lose out to competitors.
"Cloud providers have had a tough time figuring out their capacity projections," says Antonio Piraino, CTO of ScienceLogic, a provider of cloud management tools. "These days service providers are judged by their margins. Many have impressive gross margins, but for almost all of them, their net margins are in single digits. Once you account for power, software licensing, real estate and so many other costs, your profits evaporate."
Piraino argues that this puts smaller cloud providers at a disadvantage. A behemoth like Amazon can afford to have excess capacity on hand, while for smaller providers, it's a challenge that must be solved in order to compete and survive.
