Clouds weigh heavy as dollar descends

Here’s a dilemma. Let’s say you sell a service to a customer, priced per seat per month, write it up in a contract, and sign and shake on it. The next month you have to give the customer a call and tell them the price has gone up nearly 20 percent - and there’s nothing either of you can do about it.

This scenario is already playing out for Australian resellers of US cloud services after the Australian dollar fell 18 percent in a matter of months. In April the dollar was trading above US$1.05 (down from a high of $US1.10); at the time of writing it was at US92c and falling.  

“The Aussie dollar has been at parity for the last couple of years but we’re starting to fall. What happens if it drops below 90c?” says Tony Chadwick, director of strategy for Queensland reseller Rype.

Rype only sells cloud services, including productivity suite Google Apps, job management program GeoOP, accounting software Xero and document management service Box. Chadwick has already had to tell customers their US$15 monthly subscription for Box had risen by 18 percent in line with the falling Australian dollar.

Price-sensitive small businesses will see the rising US dollar as a reason to avoid cloud services from US companies, Chadwick says. “That’s another compelling argument to say we’ll stay local,” he says.

A 30-person business that in April was paying AU$450 a month for Box would now pay AU$486 a month, or $432 extra a year.

An 18 percent increase on a cloud service won’t have too great an impact as most cloud services are already relatively cheap to begin with. The main concern for SMBs is the unpredictability of the monthly invoice - what will it be this time?

Some economists are predicting the Australian dollar could fall to US mid-80 cents. Chadwick remembers working for the Australian subsidiary of a US company in 2001 when the Aussie was 63c. “I was reporting profits back at 50 percent below what they were expecting,” he says.

And a gap is opening up under Australian resellers who made the decision to sell US cloud services in local currency.

Google Australia sells Google Apps in US dollars to Australian customers and adjusts pricing for currency rate every month. But one of the world’s largest Google Apps resellers, which has offices in Australia, sells Google Apps in Australian dollars and renews its contracts annually.

The reseller will inevitably have to lump the price increase across thousands of seats until it can renegotiate contracts in six months.

The Kiwi experience

The Aussie dollar has fallen against the New Zealand dollar too. But the swarm of Kiwi cloud companies selling software to the Australian market are more likely to wear the lost revenue.

“We don't chase currency around,” says Rod Drury, CEO of cloud accounting program Xero, a New Zealand company listed on the ASX and NZSX. Xero is one of the largest cloud software companies in Australia with over 50,000 users.

“Each of our markets have different features (like Australia has payroll) and we don't see much elasticity at our already low price point. The value proposition is very clear now we're seven years into it,” Drury says.

Xero runs its accounting app on Rackspace, a US hosting company which charges in US dollars. While its hosting costs will rise with the US dollar they are a relatively small percentage of overall costs, Drury says.

“At this early stage we think price stability and growing fans’ trust is most important,” Drury says.

Australia has at least four home-grown accounting apps competing for market share – MYOB, Reckon, Saasu and Shoebooks. CCH iBizz (owned by global entity Wolters Kluwer) and QuickBooks Online (owned by US giant Intuit) were unlikely to increase their prices given their tiny customer bases and their owners’ capacity to absorb the costs.     

Xero has singlehandedly created a vibrant cloud software community riding on its coattails into the Australian market. Popular apps from New Zealand include point-of-sale program Vend, inventory management software Unleashed and GeoOP. These and other apps are likely to take their cue from Xero – unless the AUD plunges below the NZD.  

Australian developers have been slower to catch onto the cloud software craze. However, local choices are improving with Deputy, Lockbox and Connect2Field among others creating a splash.

Each day more Australian software companies emerge to give resellers options free from currency headaches.

 Virtual server, real-time headache

The highly competitive infrastructure-as-a-service market is also facing a tough run as the AUD falls. Amazon Web Services opened its Sydney data centre in November and Rackspace went live just last month, both promising to bring robust virtual servers at razor sharp prices.

But despite serving Australian customers from an Australian data centre, both companies still charge for their services in US dollars.

The upshot is that an AWS instance with 1.5GB RAM and 10GB storage (see graph) has jumped $10 from $54 to $64 and Rackspace has climbed $95 to $114.

The increase is unlikely to faze small businesses, but companies running hundreds of VMs could see increases of thousands of dollars.  

For example, one Melbourne company using AWS to design digital campaigns automatically switches on 500 servers every weekday morning.

AWS, which has defined the IaaS space, has relentlessly cut prices for its services as it has scaled upwards. This has created an expectation that IaaS costs will only go down, says Nick Bryant, founder of Australian cloud services provider Server Mule.

“It’s fair to say that with cloud computing, as it becomes more of a commodity, the prices will constantly decrease,” Bryant says. “So for any IT manager creating a budget now, that budget shouldn’t really increase. But if you’re paying in a foreign currency you can’t really plan for that.”

Cloud services comparison site Cloudorado shows a relatively tight field of seven providers with Server Mule and Elastic Hosts undercutting AWS, with Dimension Data and MacTel spin-off Ninefold only several dollars more. Another 10-cent plunge and AWS could drop from third cheapest to fifth.

Server Mule itself only recently appeared on the scene. More local competitors could emerge from under the shield of a low dollar. “We’re the best value provider at the moment. Especially now that the Aussie dollar has dropped, we’re a good value operator. We obviously set our pricing to be competitive from the outset and that was priced on parity,” Bryant says.

My feeling is that the extra cost is less of a problem than dealing with the unknowns. We consume plenty of overseas commercial and consumer products and services to understand that currencies never only work in our favour. For example, Australian companies are happy to pay higher rates for overseas services when they travel or when they are ordering products from US retail websites. Paying US prices for US cloud services is not so difficult.

Planning, and setting expectations, is really at the heart of the issue. IT has always been priced locally and companies now have to choose between the stability of a locally provided option and the moving target of a US supplier.

Resellers of US cloud software will need to formulate responses to local providers making the most of the latest changes. Currency will quickly become another weapon alongside data sovereignty, privacy, and corporate and governmental espionage made against cloud software.

PRISM, spies, lies and the cloud

For those that missed it: The Washington Post and Guardian newspapers reported the existence of a US data-collection effort known by the acronym PRISM. Run by the National Security Agency, it hoovered up communications and documents from various European and Asian governments as well as sucking up data directly from US service providers Microsoft, Yahoo, Apple, Google, Facebook, YouTube and Skype.

All these companies denied they had given the NSA access. However, the revelations have been judged to be true based on the US government’s embarrassed response.

How should Australian resellers react to this news? Should this dampen their enthusiasm for selling cloud services given the relative ease with which the US government can gain access?

There are three credible responses. The most obvious is just to ignore the PRISM initiative. It has been designed to target governments and organised crime and not legitimate Australian businesses. The NSA has its work cut out for it sifting through billions of pieces of data for threats to its national security.

Ok, if you’re BHP or Rio Tinto you’re probably not going to put your corporate secrets in Dropbox. Some of the allegations suggest PRISM has been used for corporate espionage to the advantage of the US government, and possibly US companies. But everyone else can bask in the safety of obscurity.

A second response is to stop using US cloud services. Australian and New Zealand cloud services are emerging, although many of them are running on infrastructure owned by US companies (see the Xero and Rackspace example above).

A third option - and this could be the most sensible - is to start using services which encrypt data at the point at which it is created. The best example here is file storage service LockBox, an ingenious Melbourne startup which uses a clever method of concentric keys to swap information securely between two parties.

LockBox only stores encrypted data and has no idea what is in the files. This level of encryption will no doubt become more common to allay concerns about PRISM-style surveillance, whatever the real risk is to Australian businesses.  

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[heading] Cost of a virtual server by US and Australian companies

Note: Prices are for a Linux virtual server with 1.5GB RAM, 10GB storage, 10GB outgoing and 1GB incoming traffic for a maximum of one month as supplied by Cloudorado.com.