Egregious Egress and Disruption

Oct 2, 2021
You can check-out any time you like,
But you can never leave!

ā€“ Hotel California, by The Eagles

A few days ago, Cloudflare announced its R2 cloud storage service. It's an API that lets you store and request data, implementing the industry-standard format from AWS S3. But Cloudflare's offering is disruptive to AWS. Why?

AWS's pricing model for storage is per GB (TB). Each request (e.g., get/put/delete) also incurs a flat charge. The most important (and often overlooked) fee is for bandwidth.

There are two components to bandwidth. Egress is the term used to describe the traffic from your network out into the internet. Contrast that with ingress, which is traffic from the internet into your network. Putting data into storage (ingress) is free. But once you've stored all your valuable data in the cloud, AWS charges you an arm and a leg to get it out.

You can check-out any time you like,
But you can never leave!

Data gravity causes lock-in to services. I wrote about the real switching costs of data gravity before. For a cloud provider like AWS, lock-in can be extremely lucrative.

Cloudflare's R2 offers free egress. And on top of that, it says that the service will be 10% cheaper than AWS's S3. But is it disruptive?

There are two ways to be disruptive (in the Clay Christensen definition): Low-end which are businesses that come in at the bottom of the market and serve the underserved, and new-market which competes for customers that weren't consumers before.

Ben Thompson of Stratechery thinks it is low-end disruptive, and I agree with him. Cloud providers have increasingly become difficult for smaller customers to use ā€“ outdated UI/UX and overwhelming features that have to serve enterprise customers (e.g. complexity of IAM).

And Cloudflare's move is a brilliant example of counter-positioning ā€“ to make egress free would be giving up a significant moat that they've created through data gravity, not to mention take a margin hit on one of their biggest services.

I'm not sure how this pricing and product war will turn out. Amazon and Cloudflare are both extremely strategic thinkers, and both are at operating at scale. But either way, it's great for consumers to see some innovation in the cloud storage space.