Average Cloud Contract Values are Falling

Published: April 26, 2017

Federal Market AnalysisCloud ComputingContract AwardsGSAInformation Technology

Agencies awarded more cloud contracts than ever in fiscal 2016, but the average value of awards continues to drop.

Regular readers of this blog may remember an article posted some years ago about the possibility that the mass adoption of cloud by federal agencies may fuel a deflationary price spiral that ends up squeezing most competitors out of the market. The argument made at the time was that spending on the commoditized cloud services of gigantic providers like Amazon, Google, IBM, and Microsoft could cause a steep decline in competitive pricing that benefits agencies (and taxpayers), but which also renders cloud so inexpensive that it eliminates the profit margins of smaller and mid-size vendors, thus driving them out of the marketplace altogether. As a result, one day the federal cloud market will consist of only a small number of large commercial partners with the ability to withstand those shrinking margins.

Several years on, the question is if there is evidence for this scenario coming to pass. To a certain extent there is, as some recent analysis of the commercial cloud market and a bit of data on federal agency cloud contract awards could show.

A group called 451 Research just released a report titled “In the cloud price war, cloud storage has become the new battleground,” which claims that “the cloud price battlefield has shifted from virtual machines (VMs) to object storage.” Prices for object storage in the commercial market, 451 Research says, experienced “a drop of 14% over the past 12 months. For comparison, the cloud mainstay of VMs dropped a relatively small 5% over the same period.”

To be clear, 451 Research notes that object storage margins are typically around 30% so there is still lots of room for prices to fall, but the trend is clear. In a market where customers are putting larger workloads into commercial clouds, cutting prices to remain competitive is becoming common. Now consider federal agencies in this context. They are being pushed by Congress and the Office of Management and Budget to employ cloud solutions for enterprise-level data storage and computing power (i.e., large workloads), so they can benefit from falling prices on things like cloud storage. This signals that the scenario in the commercial market discussed by 451 Research could be realized in the public sector.

Then there is the trend of falling awarded cloud contract values. The data below comes from Deltek’s database of awarded cloud contracts. It shows the average value of awarded contracts from fiscal year 2012 to FY 2016.

Part of what’s driving this decline is price dilution caused by growth in the number of cloud contracts awarded. Deltek’s database shows 165 awards made in FY 2012. This number rises each year to a high of 590 contract awards in FY 2016. In other words, as agencies award more cloud contracts, the award amounts get smaller.

It would be analytically sloppy of me to draw a direct correlation between the declining price of cloud services and awarded contract amounts, so I will not do it here. I provide this data only to suggest that something important is happening in the federal cloud market. Federal Market Analysis clients report all the time that agencies are not spending as much on cloud as they expected. The data above suggests why they are noticing that trend. Agency adoption is increasing, but the value of those awarded contracts is declining. Part of the reason this is happening could be the deflationary price cycle described above. More evidence is needed to confirm this, however, so the trend of falling average cloud contract values bears close watching.