Wednesday, October 27, 2010

The Freemium model comes to Amazon EC2

Amazon will offer free cloud services developers starting this November.

Jarrod Phipps, a student in this course, has wrote a blog post giving his thoughts on Amazon's new pricing model. He asserts:

"The main reason I believe Amazon would go this route is that cloud services are moving closer towards commodity as the cloud vendor marketplace continues to crowd. This pricing model is likely an attempt to grab customers early and hope that high intra-vendor switching costs cause them to remain loyal to EC2. We know computing cycles, bandwidth, and storage are only getting cheaper, is this the first step towards a perpetually free cloud-hosting environment for web applications?"

What are your thoughts on Amazon's new pricing?


  1. It's unclear -especially given high switching costs and the fact that it's a one-year offer- if this is real Freemium or the "traditional free sample".

  2. I believe this can be an interesting way to capture SBE's and to enable older more entrenched IT managers to dip into the world of cloud computing.
    The switching costs later on will be quite significant, especially with the inter links of different SaaS services today and the fact that Amazon's service is "the platform" for most of the other services.
    Up selling should not be too difficult down the line.

  3. Amazon is aiming to make money out of their cloud business. I think this move is related with heating competition, and the objective to be the winner-take-all. But I am still curious how is Amazon going to make money finally, through freemium model or two/three-sided platform? If freemium, who are going to pay for what kind of service? If two/three-sided platform, who are the other parties on this platform that Amazon can charge to compensate?

  4. This is interesting. Companies have previously assembled, maintained, and updated virtually all IT systems in-house. Overtime these systems have proven to be a burden as they have become rigid and difficult to maintain and update – thus inhibiting competitiveness & long term profit is they don’t update, but limiting short term profit if they do. The benefit of cloud computing is that it releases companies from much of this burden, but probably more importantly it also has the side benefit of creating massive economies of scale. These economies of scale can be divvied up between consumer and vendor, resulting in both parties reaping substantial gain....
    But what will stop the cloud vendors from reaping anything more than marginal cost? The same sword that created this opportunity may be the one they fall one when trying to reap any substantial economic profit.

    Switching costs – the answer?

    Unless the vendor cloud vendor can differentiate, there will be no switching costs. And unless this differentiation is durable, there will not be much benefit in selling at below margin in order to make it up later. There may be brief opportunities for temporal arbitrage, but all the makings of a perpetual price spiral would seem to be there.

  5. Great article Jarrod...
    And I think it's a great strategy for Amazon! Ultimately it will bring them a lot of customers and money.

  6. I think Amazon's intention is expanding customer base first and harvesting later from the growth of the customers' businesses. It seems like incubating businesses. Business owners' of entry level can concern about an appropriate initial investment and the availability for expanding the business. EC2 with freemium model can be a perfect answer to their concerns. If the business grows with large number of virtual servers and broad bandwidth, the customer and Amazon both would be happy about that. What a win-win!!

  7. I personally foresee a huge advantage in expanding the offer of the cloud computing product to the general consumer through the same online OS strategy Google is currently promoting. Locking the the end consumer in their platform will attract more commercial users that will benefit from a direct relationship with their target consumers. Since the demand in the end consumer market will influence the demand in corporate market, Amazon may go with the cross-market free model, when the corporate user will subsidize the end consumer price.

  8. I think this is a move to bring new customer segments EC2 and to also align Amazon's offering with other cloud services e.g. Dropbox. I don't see this working for commercial users. In my opinion, a serious commercial user will be more interested in business critical issues like the reliability and scalability of the service instead of free to fee.

  9. I think this is a great move. The students will disseminate to different organizations and help to expand the user base. I think this is another indication of how serious Amazon is about their AWS business.

  10. After checking out their offer on the amazon site, I agree with some of the previous posters that noted it is more like a Free Trial than Freemium pricing strategy. The use of the core services (EC2, S3, EBS, ELB) are all 12 months. Amazon may have decided to brand this "free trial" as a Freemium becuase with a free trail there are expectations from both the seller and customer that after trying out the service, a purchase will be made. So users are more willing to engage with no pressure to buy eventually, but when the free period ends and they are downgraded to the most basic service (or no service at all), they'll likely opt-in. So the pschological effect behind Freemium is more powerful.

    What's interesting is the Freemium offer is real (no expiration on free usage) for their ancillary services like SQS,SNS,SDB. This strategy will allow for greater adoption of this services but of course you have to pay for the core services to benefit from this.

    So, I think Amazon promotions were both to disrupt and lock-in customers. And Amazon gets the added bonus of lots of publicity about their product becuase of this offer announcement. Great marketing strategy too!