Google just took the lead in the dangerous game called 'Race To Zero'

When Google announced that its new Photos app would be free and come with
unlimited cloud storage it crossed a line that many in the tech industry had been watching with fear.

Price: $US0.

The cloud computing industry reads like a who’s who of profitable tech giants. But they have been nervously watching a competition started by Amazon, matched by Microsoft, and taken up with gusto by Google.

It’s called “the race to zero.”

This race refers to charging nothing — absolutely zip — for cloud services, and cloud storage is the first type of cloud service to fall.

It’s a dangerous game for the tech industry because it means that only the biggest companies with the deepest pockets and the healthiest businesses will be able to make it in the new cloud world.

Why are cloud companies racing to zero?

There are a couple of reasons for this race. For one, computer hardware, starting with storage, keeps getting cheaper. A gigabyte’s worth of storage on a hard drive in 1993 cost more than $US9,000, but it cost a mere 4 cents in 2013.

IBM mainframe 1960sIBMIBM100 – System 360

Ditto for computer processing power. In 1969 a $US3 million IBM mainframe that helped send man to the moon had 64 kilobytes of memory and operated at 0.043MHz, (note the “M”, meaning megahertz), according to Phone Arena.  Today a $US200 iPhone 6 has 16GB of memory and a processor that operates at 2.6GHz (note the “G”, meaning gigahertz).

But you can really thank Amazon for making sure that cloud computing companies actually pass those savings along to customers.

As its costs drop, Amazon cuts its prices for its cloud. By the end of 2014, Amazon Web Services had 47 price cuts in six years, it says, thanks to a culture of “frugality.”

Amazon is increasing revenue by gaining more customers and adding ever more services that customers are willing to pay for, including more expensive services. Although rates for services come down, customers spend more with Amazon over time.

It’s treating computer services like a retail store. You are more likely to stock up if you feel like you are getting a bargain on every item you buy.

Microsoft and Google have vowed to keep matching Amazon’s prices while beefing up their selection of services.

Google pulls an Amazon

But in 2015, Google took it a step further. Instead of just matching Amazon’s price cuts, it initiated a price cut on its cloud services to make itself cheaper than Amazon.

Jeff Bezos DiaperBusiness InsiderAmazon CEO Jeff Bezos

Google isn’t the first to offer unlimited storage for photos, either. Credit Amazon with that, a few months ago. But the free, unlimited price was only available to those who had Amazon Prime or a Kindle Fire device.

Google Photos is available on Android and iPhone. That’s more than 90% of new smartphones sold. That’s impossible to beat.

Microsoft, for its part, walked right up to the race to zero finish line but didn’t cross it, either. It offers unlimited storage to anyone who subscribes to its Office 365 product. But that’s not exactly free because Office 365 comes with an annual fee starting at $US70/year.

One day, all storage will be free

As for unlimited storage of things other than photos, that will still cost you at Amazon, Google, and Microsoft, as well as smaller companies like Dropbox and Box.

But make no mistake, the race to zero is still going on, and that means the whole cloud industry has to cut prices as time goes on, not raise them.

In November, Aaron Levie, CEO of the cloud storage company Box told The Information, “We see a future where storage is free and infinite.”

And that means that these companies have to come up with unique cloud services that people are willing to pay for.

Box, for instance, offers extra security around files, something enterprises are willing to pay for to make sure they comply with all laws. It’s also building other applications, like project management apps, document management apps, and special apps where people can collaborate around documents, not just store them and share them.

As storage races to zero, Dropbox is pushing harder to sell its Dropbox for Business product, which offers businesses more of the security and administrative features they need.

Meanwhile, every new company in the cloud-computing war is looking for ways to offer special services that it thinks will command the kind of high prices that won’t be dragged into the race for zero.

For instance, when Cisco announced it would spend $US1 billion on the cloud last summer, the executive leading the project, Nick Earle, was quick to declare, “Our strategy is not to follow AWS on the race to zero.”

Other big players like IBM and Oracle have declared much the same thing as they spend billions on their clouds.

That’s because this is a dangerous race

While storage and computing costs in themselves have dropped, the overall costs of running data centres are still enormous.

As these companies gain more users of their cloud, they’re on the hook for building absolutely enormous data centres and paying for their upkeep, energy usage, and so on. IBM, for instance, vowed to spend $US1.2 billion building new data centres.

Larry Page and Satya NadellaBusiness Insider/Justin Sullivan/GettyGoogle CEO Larry Page; Microsoft CEO Satya Nadella

Ditto for Microsoft, which has committed $US750 million to its data center in Wyoming over four years, and $US1.1 billion to a data center in Iowa.

So the numbers are rough: Spend billions on data centres that offer services for increasingly lower prices. Then try and find a service so special and fantastic that companies are willing pay well for it — for year.

Only a few cloud companies will manage that.

Meanwhile, the price race is on, and the front runners like Amazon, Google, and Microsoft are determined to keep up the pace.

Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.

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