South African analysts believe the local channel will feel margin pressure in the short term as software giant Microsoft sharply increases its Azure pricing.
In an e-mail to its clients last week, Microsoft said: "You're receiving this e-mail because you're associated with one or more subscriptions that are billed in South African rand.
"Microsoft periodically assesses the impact of its local pricing of products and services to ensure there is alignment across regions and markets. Our October 2018 Azure price change is an outcome of this assessment.
"Microsoft will adjust prices for pay-as-you-go subscriptions on the Azure Web site available under the Microsoft Online Services Agreement and denominated in South African rand. Effective from Tuesday, 16 October 2018, Azure prices will increase for South African rand by 23.1% to realign to global price levels."
Microsoft Azure is a powerful platform with a range of services and data centres across the world. The company is preparing to launch two Azure data centres in SA, which will go live later this year.
The local data centres will offer numerous services and provide a scalable platform for customers, while retaining security.
Significant uptake
Commenting on the price hike, Mark Walker, associate vice-president for Sub-Saharan Africa at IDC, says Microsoft Azure and the Office 365/Dynamics365 platforms have enjoyed significant uptake in the South African market over the past 24 months.
He believes the major benefits of Microsoft having its Azure data centres in SA are that latency issues impacting the transit time between data in the cloud and the user will significantly be reduced, and legal concerns about the legal sovereignty of data held in the cloud will be addressed.
"Given that the percentage increase is closely aligned to the fall in the ZAR/USD exchange rate over the last two months, the increase was not unexpected, as most global technology vendors use USD-based pricing models," says Walker.
"The local channel typically attempts to hedge against exchange rate volatility by purchasing forward cover to protect themselves against sudden changes. However, this also depends on the individual channel company and their risk appetite so there may be casualties among companies that did not foresee so sudden a fall in the rate."
In the short term, Walker says, margin pressure is likely to be strong until the new pricing schedule is passed on to the end-user.
"Should the exchange rate continue to deteriorate and margin pressure continues, then it is likely channel companies would consider implementing cost-cutting measures. Hopefully, the South African macro-economic situation improves and the exchange rate gets stronger.
"Failing this, we can expect higher pricing which, in turn, will lead to decreased demand and a general slowing of the adoption of technology as a 'mend and make do' attitude from the end-user starts to take hold."
Local competition
Arthur Goldstuck, MD of World Wide Worx, points out that the "Cloud in Africa 2018" study the company did with F5 Networks earlier this year revealed market share in cloud provision is strongly related to sales presence in the country and on the continent.
"It shows Azure having around 50% market share in both South Africa and Nigeria. However, in both countries, a high proportion of enterprises (66% in SA, 60% in Nigeria) have two or more providers. So, while Azure dominates, enterprises do spread their activities across others as well.
"Google has around a quarter of the market in both countries, followed by Oracle and AWS [Amazon Web Services]. However, once AWS launches its own data centres in this country (which is inevitable), we may see a big shift. With Microsoft launching its data centres here imminently, however, it is likely to carve out an even bigger segment of the market for itself."
Goldstuck points out that large enterprises are not as price-sensitive as SMEs, but for the latter, the increased pricing may push them to explore the alternatives.
"Even large enterprises, where they make heavy use of a variety of cloud services, would think twice about continuing with a service that hikes its prices by 23%. It is a serious challenge to their budgets, and Microsoft is probably hoping the cost of transitioning to a different provider would be even higher."
For Adrian Ho, Ovum's principal analyst, responsible for Asia-Pacific, Africa and Middle East enterprise practice, local data centres are very critical especially in regulated industries, banks, healthcare, government, legal, etc.
"Increasingly, in more and more countries, data residency is becoming mandatory, especially for customer data sets. So local data centres have become a must-have now. This will help to increase adoption of cloud services in this country as more global providers are here to push the envelope. We have seen this elsewhere when the big guys come play, the tipping point is reached."
From a channel perspective, Jonathan Kropf, CEO of Velocity Group, specialist South African hybrid cloud enablement partner, notes the impact of the price increase will not have much effect on the partner ecosystem.
"Partners now need to look at the workloads and optimise them in Azure (as an example, smart partners can create scripts to shut down and start up servers when not in use) and correctly assess and map workloads during the on-premises to cloud migration phase."
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