Since this is the time when many companies are preparing their budgets for the next fiscal year, I thought it would...
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be helpful to examine the pricing practices of some of the most well-known cloud service providers. CIOs, CTOs and CISOs negotiating budgets for their department need to be able to predict the cost of any cloud services they plan to use. However, my examination indicates the costs of many major cloud services are unpredictable, making the budget process difficult.
I reviewed the cloud pricing practices in the contracts of five top cloud service providers. Four out of these five cloud contracts do not provide much information on how price for services will evolve. As a result, it will be impossible to have any visibility on future costs to the company. Note that service agreements evolve; the terms I reviewed were current as of Nov. 14. Let’s see how the providers’ cloud computing pricing practices stack up.
Rackspace Hosting Inc. wins for “most complex formula” and “most unpredictable pricing.” According to Section 8 of the Rackspace Cloud Terms of Service, the prices may increase at any time on 45 days advance written notice, in the case of a month-to-month contract. In the case of a term contract, the fees may increase “as of the first day of the renewal term that begins 45 days from the date of the written notice.” There is no commitment as to the nature or size of the increase.
The Rackspace contract refers to the Producer Price Index (PPI), an index published by the U.S. Bureau of Labor Statistics that measures the average change over time in the selling prices received by domestic producers for their output. There are several categories of PPI depending on the nature of the goods being sold, for example, PPI for crude goods, PPI for intermediate goods, PPI for finished goods and PPI for industrial commodities. PPI and CPI (Consumer Price Index) are often used as a reference when determining caps for price increases in contracts. The reference to PPI or CPI allows the purchaser to ensure the contract prices do not increase more than the cost of producing the goods or services that are the subject matter of the contract.
During the term or any renewal term of the Rackspace contract, if there is an increase in the Producer Price Index (PPI)for finished goods over the PPI reported for the month in which the customer signed the contract, Rackspace may increase the fees by the same percentage as the increase in the PPI without waiting for the end of the term. For example, if the PPI for finished goods increases by 5% from the date of contract execution, Rackspace may increase the monthly fee by 5%, even though the contract is for a term. This increase may occur only once per twelve months, and on 30 days advance written notice. Nevertheless, there is “double dipping.” The prices may change at each renewal term, and even if the customer has made a commitment for a long-term contract (as opposed to month-to-month) the prices may increase during the term if the PPI changes.
Microsoft wins for “most unpredictable pricing terms.” The Microsoft Windows Azure service is offered directly online, subject to the MicrosoftOnline Services Subscription Agreement can choose between a Committed Offering (where the customer commits in advance to purchase a specific quantity during a term), Consumption Offering (where the customer pays based on actual usage in the preceding months with no upfront commitment) or Combination Offering (which combines the two offerings).
In these agreements, the changes in prices will occur “at any time, on notice.” There is no minimum notice period. This is even more unpredictable than other contracts discussed in this article, which give between 30 and 45 days prior notice. Under Section 3b of the Microsoft Online Services Subscription Agreement, “prices and price levels are subject to change at any time on notice” in the case of a Consumption Offering and to change “at the beginning of any Subscription renewal” in the case of Commitment Offering.
This means there is minimal predictability. If you want to be able to anticipate the cost of the Microsoft service, the best route is to purchase a “Commitment Offering,” which will allow you to forecast the pricing for the duration of the term for which you made a commitment; this is better than what Rackspace offers. However, you should remember there is no visibility on the prices after the expiration of the term. Once the term expires, the prices could skyrocket. If you sign up for a month-to-month contract, there is no visibility at all, just as with Rackspace. Prices can increase at any time; there are no limits.
Amazon and Google
Amazon and Google kindly offer a 30-day notice. According to Section 5.1 of the AWS Customer Agreement, Amazon “may increase or add new fees and changes for any existing Services by giving you at least 30 days advance notice.” This AWS contract has an indefinite term, which the customer can terminate at any time (see Section 7.1).
The pricing regime in the Google contract is substantially similar. Section 10.5 of the Google Apps for Business Online Agreement provides: “Google may revise its rates for the following Services Term by providing Customer written notice (which may be by email) at least 30 days prior to the start of the following Services Term.” Thus, the price is fixed for the term, which can be a flexible term or an annual plan.
In both cases, however, while there is a 30-day notice, there is no commitment for a cap on the price increase. Thus, just like for Microsoft, the price could skyrocket unexpectedly. For many entities, 30 days will not be sufficient to transition to a more affordable alternative.
Finally, the “best in class” award goes to Salesforce.com. The Salesforce.com Master Subscription Agreement includes a cap of 7% on any price increase. Section 12.2 of the agreement states: ”Except as otherwise specified …, [the] per-unit pricing during any … renewal term shall be the same as that during the prior term unless we have given you written notice of a pricing increase at least 60 days before the end of such prior term, in which case the pricing increase shall be effective upon renewal and thereafter. Any such pricing increase shall not exceed 7% of the pricing for the relevant Services in the immediately prior subscription term, unless the pricing in such prior term was designated in the relevant Order Form as promotional or one-time.”
While a 7% increase would be a hefty one in an era where money market accounts barely earn .25% interest, at least we can commend Salesforce for making a commitment to keep pricing within predictable limits and providing a specific cap for price increases.
At a time where budgets are tight, and are decided months before the funds are actually spent, it is important for CIOs, CTOs and CISOs to be able to predict with some reliability what their needs will be, so the company’s budget takes their needs into account. The unpredictability of cloud computing pricing is a problem.
If your company or your cloud budget is not large enough for you to be able to negotiate the terms of your cloud computing contract, you should be aware that prices can change on a whim, and that, with most cloud service providers, you will have no visibility on potential price increases.
For those who are lucky to be able to negotiate a cloud contract, consider looking at the sentence regarding the 7% cap in the Salesforce.com agreement as an example of what you should try to negotiate with your cloud provider.
About the author:
Francoise Gilbert focuses on information privacy and security, cloud computing, and data governance. She is the managing director of the IT Law Group and serves as the general counsel of the Cloud Security Alliance. She has been named one of the country’s top privacy advisors in a recent industry survey and, for several years, has been recognized by Chambers USA and Best Lawyers in America as a leading lawyer in the field of information privacy and security. Gilbert is the author and editor of the two-volume treatiseGlobal Privacy & Security Law, which analyzes the data protection laws of 60-plus countries on all continents. She serves on the Technical Board of Advisors of the ALI-ABA and co-chairs the PLI Privacy & Security Law Institute. This article only reflects her personal opinion and not that of her clients or the Cloud Security Alliance.