Established software vendors face a difficult balancing act between meeting customer demands for pay-per-usage cloud pricing models while guarding against revenue erosion on traditionally priced offerings. If Amazon’s price for Oracle Database on RDS becomes the norm for price discrimination between traditional and per-per-usage licenses, IT buyers could find themselves paying over a 100 percent premium for the flexibility of pay-per-usage pricing.

Note, I am only using Oracle as an example here because the pricing of Amazon RDS for Oracle Database is public. This post intends to make no judgments on Amazon or Oracle’s price points whatsoever.

Pay-per-use software pricing limited to entry level product
Amazon RDS for Oracle Database offers two price models, “License Included” or “Bring Your Own License (BYOL)”. The License Included metric is fancy terminology for pay-per-usage, and includes the cost of the software, including Oracle Database, underlying hardware resources and Amazon RDS management.

Three editions of Oracle Database are offered by Amazon, Standard Edition One (SE1), Standard Edition (SE) and Enterprise Edition (EE), listed in order of lowest to highest functionality.

It’s important to note that pay-per-use pricing is only offered on the lowest function edition, namely, Oracle Database SE1. This should not be a surprise as Oracle, like other established vendors, is still experimenting with pay-per-usage pricing models. Customers can also run Standard Edition One using a BYOL model. This fact, along with Oracle’s list pricing, helps us do some quick and interesting calculations.

Oracle Database SE1 software price-per-hour ranges between $0.05 to $0.80
The License Included and BYOL prices both include the cost of the underlying hardware resources, OS and Amazon RDS management. The only difference between the two options is the price of the Oracle Database software license.

This allows us to calculate the per hour cost of Oracle Database Standard Edition One as follows:

The Oracle list price for Oracle Database SE1 is $5,800 plus 22 percent, or $1,276 for software update, support and maintenance. Like most enterprise software, customers could expect a discount between 25 to 85 percent. For lower priced software like Oracle Database SE1, let’s assume a 50 percent discount. Although, most customers buying Oracle software are encouraged to enter into Unlimited License Agreements (ULAs) which frequently offer discounts at the higher end of the spectrum.

All told, Oracle Database SE1 after a 50 percent discount would cost a customer $3,538 (($5,800 + $1,276) x 50%) for 1 year or $4,814 ($5,800 + $1,276 + $1,276 + $1,276) x 50%) for 3 years on a single socket quad core machine like this low end Dell server. Note that Oracle doesn’t use their typical processor core factor pricing methodology for products identified as Standard Edition or Standard Edition One as they are targeted at lower performance servers.

A single socket quad core machine would offer the performance of somewhere between the Amazon “Double Extra Large DB Instance” and the “Quadruple Extra Large DB Instance”.

Consider the long term costs of per-per-usage
Using “Double Extra Large DB Instance” pricing, with our calculated cost an Oracle Database SE1 software license on Amazon of $0.40/hr, we can calculate a 1 year cost of $3,504 and a 3 year cost of $10,512. These figures represent a 1 percent lower and 118 % higher cost of using Amazon’s per-per-usage offering versus licensing Oracle Database SE1 through Oracle for on premises deployment or a BYOL for deployment on Amazon RDS.

There are obviously multiple caveats to consider, like the ability to get lower or higher discounts from Oracle, or comparing with the “Quadruple Extra Large DB Instance” price point.

A customer that is unable to get a 50 percent discount from Oracle could save licensing costs by using Amazon’s pay-per-usage offering for Oracle Database SE1. For instance, with only a 25 percent discount from Oracle, the customer could save up to 34 percent on a 1 year basis, but stands to pay an extra 46 percent a 3 year basis.

Comparing the cost of Oracle Database SE1 using traditional licensing on premises with Amazon’s pricing through RDS, it appears that customers should look hard at Amazon’s per-per-usage offering for up to a 1 year term, but stick with Oracle’s traditional pricing model if the software is going to be used for the typical 3 to 5 year period that companies like to amortize costs over.

The obvious rebuttal to the above calculations would be that a customer electing for a pay-per-usage model would not necessarily run for 24 hours a day for a full year. While this is true, buyers should understand the long term cost implications before making short term decisions.

Follow me on Twitter at SavioRodrigues. I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies, or opinions.”

Amazon selecting open source Apache Tomcat as the Java application server powering Amazon’s entry into the Java Platform as a Service (PaaS) market came as little surprise to Java vendors and industry watchers. Amazon’s pricing strategy on the other hand will surely surprise some vendors and IT decision makers. Additionally, Amazon’s apparent lack of contributions to the Apache Tomcat project should be considered during Java PaaS selection decisions.

Betting on Java in the cloud
Amazon’s newly announced AWS Elastic Beanstalk beta cloud offering is being positioned as proof that Java is in fact alive and well. Sacha Labourey, CEO at CloudBees, a Java PaaS provider, writes: “This is great news as it reinforces the message that the future of Java is in the cloud, not on premises.” I’d adjust Labourey’s comment to read: “the future of Java is in the cloud, and on premises”.

Amazon’s Jeff Barr explains AWS Elastic Beanstalk as follows:

AWS Elastic Beanstalk will make it even easier for you to create, deploy, and operate web applications at any scale. You simply upload your code and we’ll take care of the rest. We’ll create and configure all of the AWS resources (Amazon EC2 instances, an Elastic Load Balancer, and an Auto Scaling Group) needed to run your application. Your application will be up and running on AWS within minutes.

When the de facto public cloud provider, Amazon, launches a Java-based PaaS offering, ahead of another language such as Ruby, that speaks volumes about Java’s future.

Amazon’s loss leader pricing for AWS Elastic Beanstalk
While AWS Elastic Beanstalk is seen as good news for Java, Amazon’s pricing strategy may not be welcome news for some Java vendors.

Amazon’s Barr mentions, almost in passing, “PS – I almost forgot! You can build and run Elastic Beanstalk applications at no charge beyond those for the AWS resources that you consume.”

Amazon has effectively set the price for the operating system, web server, Java runtime and application server software components of a public Java PaaS at $0.00/hr.

Aside from these software components, functionality to monitor a running environment and proactively provision and scale up and down resources to meet service level agreements would be considered key elements of a PaaS.

Amazon offers these capabilities through Amazon Elastic Load Balancing and Auto Scaling, the latter being a feature of the Amazon CloudWatch monitoring service.

Elastic Load Balancing costs $0.025 per hour per elastic load balancer, while Auto Scaling is available at no charge for an every-five-minute monitoring cycle frequency, or for $0.015 per instance hour if an every-one-minute monitoring cycle is required. When these costs are added into the picture, Amazon’s Java PaaS, excluding hardware, storage and bandwidth charges, costs as little as $0.04 per instance hour including one load balancer. Over a year, this setup would cost about $350.

Amazon’s loss leader pricing strategy poses a challenge for emerging PaaS providers to offer equivalent function at such a low price point. Emerging PaaS vendors will attempt to differentiate versus Amazon’s offering, thereby hoping to defend a higher price point for their offerings.

The price point could also impact established open source based Java providers that have grown based on a lower cost of acquisition value proposition. Enterprises drawn to these solutions for a departmental or less business critical application could become enamored with Amazon’s $350 per year price point. After years of telling IT buyers to make purchase decisions for certain projects based on acquisition cost alone, these open source vendors may have to face the stark reality of their buyers agreeing, and using Amazon’s PaaS as a negotiation tool.

Amazon taking more than it gives to open source?
What’s more troubling for customers is Amazon’s willingness to take seemingly an order of magnitude more from the open source commons than it contributes.

For instance, while relying on the adoption and brand awareness of Apache Tomcat, Amazon is not even a current sponsor of the Apache Software Foundation. Additionally, it appears Amazon is not an active contributor to the Apache Tomcat project.

Amazon is not duty bound to sponsor or contribute to Apache simply because it’s using Apache developed code. However, if Amazon’s Java PaaS is wildly successful, or even successful enough to lower the price point customers are willing to accept for a public Java PaaS, then vendors who fund Apache Tomcat development, and who must now compete with Amazon’s Java PaaS price point, will have to reconsider their investments in the Apache Tomcat project.

Declining vendor sponsored contributions to the Apache Tomcat project would be of concern to the many customers that utilize Apache Tomcat either directly or indirectly, and in a cloud environment or not. Amazon could choose to contribute resources into the Apache Tomcat project to offset declining contributions from existing vendors in the Apache Tomcat community. This would however add to Amazon’s cost structure for AWS Elastic Beanstalk, and thereby necessitate a price increase or for Amazon to accept lower profit margins.

Advice for IT decision makers
IT decision makers interested in deploying public cloud PaaS workloads should start considering Amazon’s AWS Elastic Beanstalk. However, do so while understanding that Amazon’s current pricing may not fully reflect the true costs of developing and delivering a Java PaaS to customers.  Amazon can only rely on the contributions of a community while competing with the main contributing vendors to that community for so long. Also, don’t be surprised if Java PaaS vendors, established or emerging, are unwilling to compete at Amazon’s price point, but would rather offer differentiated value.

Interesting times ahead, for IT buyers and vendors alike.

Follow me on Twitter at SavioRodrigues. I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies, or opinions.”

While Red Hat’s leadership in the enterprise Linux market is without question, questions have been raised about Red Hat’s inability to retain its “market leader” position in the growing public cloud market. Growth prospects for Red Hat Enterprise Linux (RHEL) were delivered yet another hurdle as Amazon announced its own Linux AMI.

IT decision makers considering cloud investments should understand Amazon’s Linux AMI offering and its pricing versus Red Hat’s cloud offerings and pricing.

Amazon’s RHEL-compatible Linux
After some discussion it was uncovered that Amazon’s newly announced Linux AMI is in fact based on CentOS, which in turn is based on RHEL.

It’s interesting to note that Amazon’s entry into Red Hat’s market, using a RHEL-variant has not been met with the negative press that Oracle faced when they announced a RHEL-compatible Linux OS. Perhaps, it’s because Oracle was going after the enterprise, which has been Red Hat’s turf, while Amazon is going after the cloud OS arena, where Red Hat has yet to establish itself versus Ubuntu.

Amazon explained the impetus for this new offering:

Many of our customers have asked us for a simple starting point for launching their Linux applications inside of Amazon EC2 that is easy to use, regularly maintained, and optimized for the Amazon EC2 environment. Starting today, customers can use Amazon Linux AMI to meet these needs.

Amazon further detailed some of the benefits of using the Amazon Linux AMI, versus, for instance using another Linux AMI available on Amazon EC2 or building one’s own Linux AMI:

The Amazon Linux AMI is a supported and maintained Linux image provided by Amazon Web Services for use on Amazon Elastic Compute Cloud (Amazon EC2). It is designed to provide a stable, secure, and high performance execution environment for applications running on Amazon EC2. It also includes several packages that enable easy integration with AWS, including launch configuration tools and many popular AWS libraries and tools. Amazon Web Services also provides ongoing security and maintenance updates to all instances running the Amazon Linux AMI. The Amazon Linux AMI is provided at no additional charge to Amazon EC2 users.

Why Red Hat should be concerned about Amazon’s Linux AMI
IT decision makers should take note of two key related points.

First, the Amazon Linux AMI is provided at no charge for Amazon EC2 users beyond the per hour infrastructure charge, which starts at $0.085 per hour.

Second, Amazon is offering support for the Amazon Linux AMI through AWS Premium Support, which starts at the greater of $100 per month or $0.10 per dollar of total monthly AWS charges.

Contrast this with Red Hat’s pricing options for Amazon EC2.

Existing Red Hat customers that qualify have the option of repurposing existing unused RHEL entitlements on Amazon EC2. According to Red Hat, in order to qualify, a customer must, amongst other requirements:

Have a minimum of 25 active subscriptions and move only not currently used Red Hat Enterprise Linux Advanced Platform Premium and/or Red Hat Enterprise Linux Server Premium subscriptions and have a direct support relationship with Red Hat.

New or existing Red Customers also have the option of using the Red Hat Enterprise Linux Hourly Beta, which is priced at $19/month plus $0.21/hr, which is in addition to Amazon’s EC2 infrastructure charge.

According to Red Hat, RHEL Hourly Beta customers receive “Support for the Hourly Beta offering includes two-day, business-hour response and email-only support”. This level of support is equivalent to a RHEL Basic Subscription – priced at $349 per year, which translates to $0.040 per hour.

It’s interesting that Red Hat has opted to charge over 5 times as much for RHEL Hourly Beta as a customer deploying RHEL would pay for an equivalent level of support in a traditional datacenter deployment. On the other hand, this leaves Red Hat plenty of room to revise their pricing as the RHEL Hourly offering moves from Beta to generally available status.

Next, let’s compare Red Hat’s RHEL Hourly Beta pricing versus using the Amazon Linux AMI with AWS Premium Support. A customer wishing to run more than 16 days, or 386 hours, a month of RHEL workload on Amazon EC2 could achieve a lower cost through the Amazon Linux AMI.

With Amazon’s entry into the Linux OS market, enterprises now have the ability to run a RHEL-compatible Linux distribution with support from a trusted vendor for as little as $100 per month.

It will be interesting to watch Red Hat respond. As shown above, Red Hat’s current RHEL price premium for cloud environments is large enough that it could potentially be decreased to address competitive price pressure.

Follow me on Twitter at SavioRodrigues. I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies, or opinions.”