How does Amazon price its cloud computing services?

This was one of the questions that were critically discussed by Professor Nicola Dimitri on delivering his Inaugural Lecture as MSM-Corvers Chair in Innovation Procurement at Maastricht School of Management on 6 October 2016.

In his lecture entitled “Pricing Cloud Computing Services”, Professor Dimitri started out by describing the rapid rise of cloud computing over the past decade, noting that “The possibility of profitable use of IT excess capacity by some providers, matched with the need by customers to save on buying IT infrastructures for software services, data storage etc., led to a flourishing market where potential clients can successfully satisfy their demand for such performances. Use is increasingly so wide spread that cloud computing is becoming a utility, along the lines of energy, water, telephone and postal services”.

Professor Dimitri then explained the main types of cloud computing services available today, including Software as a Service (SAAS), Platform as a Service (PAAS) and Infrastructure as a Service (IAAS).

In the latter regard (IAAS) he asked why Amazon, the single largest current provider of cloud computing (with more than 30% of the market share) uses three different “rules” to set the price of their IAAS?

To answer this Professor Dimitri made an economic comparison of Amazon’s pay-as-you-go (PAYG), on-demand (OD) and spot-market (SM) pricing rules concluding that having only PAYG and OD may seem to make most sense from the perspective of Amazon at first hand, with the SM price potentially leading to lower expected revenues. So why does Amazon then persist with a SM pricing rule?

The answer is that the SM is a mechanism for Amazon to gauge the distribution of customers’ values on cloud computing services. This is because an SM induces truthful bidding by the customers, revealing the value they put on the cloud. Such a value can then be used by Amazon to optimally calibrate the parameters that determines the PAYG and OD prices.

The full lecture is available here as a MSM Working Paper.

Corvers The Corvers-MSM Chair in Innovation Procurement  has been set up in 2016 by MSM and Corvers Commercial and Legal Affairs. Corvers is a leading legal consultancy firm in the Benelux area, specialized in European public procurement law, innovation, IPR and contracting. Corvers is consortium partner for the European Commission’s EAFIP initiative (www.eafip.eu) on innovation procurement.

Professor Nicola Dimitri is holder of the Corvers-MSM Chair in Innovation Procurement, Maastricht School of Management. He is also Professor of Economics at the University of Siena (Italy), Visiting Professor at the Institute for Advanced Studies (IMT) Lucca (Italy) and at the Computer Science Department of Liverpool University (UK), and Life Member of Clare Hall College (Cambridge-UK). He was formerly Deputy Rector of the University of Siena.