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Cloud costs continue to rise among IT commodities

CIOs can expect higher cloud costs as the U.S. government's wholesale inflation index hits its highest rating for the technology category that includes this IT model.

The U.S. government's inflation index recorded the highest-ever reading for a technology category that includes cloud computing, which has become a core component of enterprise IT strategies.

The Producer Price Index (PPI) for July, released late last week, reported a year-over-year price hike of 2.8% for data processing, hosting and related services, a grouping in which cloud is an important contributor. Prices in this sector, which saw a month-over-month uptick of 0.5%, have been growing steadily since September 2022.

Increasing labor costs have contributed to rising cloud prices, according to industry watchers. Another factor is the rise of generative AI. Cloud providers are embedding the technology in their offerings, which has begun to influence their pricing.

Generative AI influences pricing

Salesforce, for example, announced an average list price increase of 9% across Sales Cloud, Service Cloud and other offerings. The company said the last price increase took place seven years ago, noting the delivery of thousands of features -- including "generative AI innovations" -- since that time.

In addition, ServiceNow plans to introduce generative AI capabilities in premium versions of its IT Service Management, Customer Service Management and HR Service Delivery products. The list price for those offerings, which are scheduled for availability in September, is expected to be 60% higher than the Pro versions of those products, according to C.J. Desai, president and COO at ServiceNow, speaking at the company's July earnings call. He said the pricing expectation is "based on the value that we believe our customers will derive with additional gen AI features."

It is inevitable that this cost [of running generative AI] will be passed on to the end user.
Sid NagVice president analyst, Gartner

Sid Nag, vice president analyst at Gartner, said such price increases are to be expected. He said some cloud providers estimate that an interaction with a generative AI application such as ChatGPT will likely cost about 10 times more than a standard keyword search. Such interactions involve a transformer-based query mechanism, using natural language processing and sequence transduction, he added.

"It is inevitable that this cost will be passed on to the end user," Nag said.

He also pointed to industry estimates that peg the cost of running generative AI large language models at up to $4 million a day.

Other factors driving cost increases include energy consumption as cloud providers deal with cooling compute environments consisting of massive DPU and GPU clusters. Also, customizing generative AI for hardened enterprise adoption will compel cloud providers to address issues such as privacy, sovereignty, sustainability, ethics and legal requirements, Nag added.

"These, in turn, will drive costs up as well," Nag said.

Price increases are becoming widespread among SaaS providers, said Eric Christopher, CEO at Zylo, a SaaS management platform company.

"I can't think of a SaaS provider not looking to increase pricing this year," he noted. "IT leaders will need to be extremely scrupulous with their dollars. Nice-to-have purchases are not happening, and we're seeing CIOs and their teams starting to investigate their current stack to find opportunities to consolidate and cut waste."

Chart showing inflation trends across IT commodities.
Cloud cost increases lead those for other IT commodities.

Hardware costs continue decline

While cloud costs rose, hardware prices continued to drop in July. Host computers and storage dropped 9% year over year and 0.1% month over month. Storage prices dropped 3.1% year over year and 0.9% month over month, according to the PPI. The June hardware price drop brought server and storage prices to levels not seen since 2021.

Professional services prices, meanwhile, increased 1.3% year over year and 0.1% month over month.

John Moore is a writer for TechTarget Editorial covering the CIO role, economic trends and the IT services industry.

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