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Cloud costs continue to rise in 2024

Enterprises might look more closely at workload allocation and explore alternative platforms amid ongoing cloud price hikes. Storage costs are also trending upward.

The cloud inflation trend looks set to persist in 2024, extending the need for cost-cutting measures that intensified last year.

U.S. government economic data and vendor research point to a pattern of rising cloud costs. The Bureau of Labor Statistics' Producer Price Index (PPI) for January, released last week, reported a 0.6% month-over-month increase in data processing and related services, a category that includes cloud computing. The year-over-year uptick stands at 3.7%. The PPI, a measure of wholesale inflation, has shown a steady increase in cloud costs since September 2022.

In addition, Vertice, which provides a cloud and SaaS cost optimization platform, reported continuing inflation in the SaaS segment of cloud computing. The company analyzes its customer base and its software vendor pricing database to track inflation.

Eldar Tuvey, CEO and founder at Vertice, projected an annual average SaaS inflation rate of 10.6% for the first quarter of 2024, which he said is broadly in line with the 11.4% rate the company reported for Q4 2023. Tuvey said his company continues to see "surging prices across the software industry."

Cloud costs increase 'across the board'

David Linthicum, chief cloud strategy officer at Deloitte Consulting, said he believes cloud inflation is "across the board" -- rather than strictly concentrated in the SaaS arena. The cost crunch, however, goes beyond vendor pricing. Enterprises hurt themselves with cloud-only policies, which culminated in a "mad dash" to the cloud during the COVID-19 pandemic, he noted.

They lifted and shifted and hoped for the best, and the best wasn't there.
David LinthicumChief cloud strategy officer, Deloitte Consulting

"Most enterprises expected cloud costs to track lower," Linthicum said. "They lifted and shifted and hoped for the best, and the best wasn't there."

Businesses rushing to the cloud often moved underutilized or underoptimized on-premises applications, which became costly to run in the cloud, he said. In some cases, companies might not have conducted a thorough analysis of which in-house IT assets would benefit from cloud migration, he added.

"The cloud is not going to be the optimal place for every application, workload and data set," Linthicum said.

A more balanced approach that considers on-premises IT, colocation and other noncloud options can help enterprises keep cloud costs in check, he said. They should also be wary of legacy applications that require emulators or code translators when migrating to the cloud. Mainframe applications running in the cloud, for example, could cost organizations 10 times the price tag of keeping them in house, Linthicum noted.

Legacy-to-cloud migrations are "fraught with technical obstacles," according to Gartner.

Tuvey said continued cloud price increases could spark a shift among SaaS customers to cheaper alternatives. He cited an increase in the number of customers replacing Zoom with Microsoft Teams in Q4 2023, a move he said is substantially more affordable.

Bar graph showing IT inflation trends for January 2024.
Key IT commodities showed month-over-month increases in January with cloud computing leading the way.

Storage pricing on the up

As cloud prices continue to rise, the same holds true for storage. The PPI for computer storage devices saw a 0.1% increase in January, the fifth consecutive month of increases after a downward pattern earlier in 2023. NAND flash, which accounts for a considerable chunk of storage systems costs, has been on the rise, contributing to the pricing trend.

"NAND flash has seen a huge increase since it was selling below cost in mid-2023," said Jim Handy, a semiconductor and solid-state drive (SSD) analyst at Objective Analysis. "It has since largely recovered."

The company's analysis of NAND flash spot pricing shows a rapid climb, starting in the second half of 2023. Most flash customers purchase the commodity based on contract pricing, which is more stable than spot pricing -- the latter is subject to dramatic fluctuations. But spot pricing serves as a leading indicator for contract pricing, Handy noted.

Contract pricing is indeed trending upward. TrendForce, a market research firm, estimated a 26.3% quarter-over-quarter increase in NAND flash contract pricing for Q1 2024.

Since about 80% of an SSD's manufacturing cost stems from flash, SSD prices tend to follow those trends fairly closely, Handy said. Looking ahead, he expects prices to level off by midyear and decline again in Q3 and Q4 as AI spending cools off from its anticipated high levels in the early part of the year.

Until then, enterprises deploying generative AI in production applications will drive increased storage hardware demand, according to industry executives.

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

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