Today Red Hat (disclosure: Red Hat is my employer and I am working as Director, OpenShift strategy but this blog post is not representative of their views and this is my personal take) announced significant price cuts to their OpenShift Online service. They slashed down the price of gears by 50% in their silver plan which includes enterprise grade support through Red Hat Technical support. Twitter is in a frenzy over the price cut. I thought I would use this longer form post to talk about the significance of this news from an industry perspective.
- The most obvious explanation is that Red Hat is reacting to market trends. AWS, Google and Microsoft are reducing the prices for their Infrastructure as a Service offering and obviously developers will expect Platform vendors to do the same. OpenShift is taking a more aggressive stance here which has a potential to trigger price wars between PaaS vendors. I would now expect other vendors to follow the suit.
- If we take out this obvious explanation, the next obvious explanation is that in the services economy, providers are taking a “low margin high volume” approach to monetization. This is a pretty standard industry game plan and Red Hat OpenShift is playing the same game as other large cloud service providers.
Having stated the obvious, let me discuss the not so obvious significance associated with this announcement
- First, and foremost, this announcement talks about the technical advantage OpenShift platform has over some of its competitors in the enterprise space. The container model used by OpenShift allows them to pack high density of applications inside a server and the platform is architected to efficiently manage applications based on the activity. This efficiency, coupled with the high density packaging of applications and operational efficiency of OpenShift Ops team, gives Red Hat enough leeway to offer this significant price reduction. This brings into focus an important lesson for enterprises wanting to use private PaaS for their organization. Usually, enterprise Ops people are efficient and their biggest bottleneck is from the technology. The OpenShift Online use case showcases how enterprises can leverage OpenShift to streamline their IT and offer their developers a PaaS environment similar to hosted PaaS offerings. Now Enterprise Ops can leverage their own smarts and technical efficiency of OpenShift platform to bring down their IT costs just like how Red Hat is doing with OpenShift Online.
- Red Hat is an open source company with a business model based on support services. The biggest attraction about cloud computing for me in 2008 was the fact that it can offer open source vendors additional monetization opportunities. For Red Hat, OpenShift Online is a newer revenue model. Many people had wondered if Red Hat is using OpenShift Online to showcase their platform to their potential enterprise customers wanting to use private PaaS. Even though OpenShift Online serves that purpose very well, Red Hat is also focussed on monetization through OpenShift Online in the long run. Today’s price reduction shows their seriousness about this monetization model and I expect to see it grow big inside Red Hat going forward.
There seems to be some confusion in the minds of users about the price reduction. Let me take this blog post to clear any confusion. The well known Cloud Parody account posed the following question to me after I tweeted the news about price reduction
I think there is some misconception about OpenShift’s strategy on usage based pricing. The importance of usage based pricing lies in the fact that it lowers the barriers to entry for organizations wanting to use compute resources. The usage based pricing model levels the playing field between individual developers, SMBs and large enterprises when it comes to consumption of compute resources.
The person behind the spoof account seems to think that the $20 base price for our silver plan is a barrier to entry to OpenShift. They are wrong. We already removed the barrier to entry with our free plan. The silver plan offers enterprise grade technical support to users who want to go beyond treating cloud services as a toy.
I believe a usage based pricing model without a free option prohibits experimentation whereas the free plan offered by OpenShift Online gives a significant amount of platform resources for experimentation at no cost. The weak link in usage based pricing lies in the cost associated with scale. This is exactly why you hear Zynga-like stories in the market.
Today’s price reduction to OpenShift Online is about reducing the price to scale while still ensuring that there is no barrier to entry. If the punditry thinks today’s price reduction is an attempt to bring more people to OpenShift Online, they are wrong. We have free plan to handle those needs. This price reduction by Red Hat is alleviate some of the costs associated with scaling for serious PaaS users. I hope this clarifies the importance of this price reduction for pundits with Twitter accounts (myself included).