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On Friday, Amazon Web Services (AWS) announced an 18 percent price reduction for the first generation Standard (m1) instances running Linux in the US East (Northern Virginia) and US West (Oregon) regions.  Here are the details: Small instances reduced from $0.08/hour to $0.065/hour, medium instances reduced from $0.16/hour to $0.13/hour, large instances reduced from $0.32/hour to $0.26/hour, and extra-large instances reduced from $0.64/hour to $0.52/hour.

For those keeping count, this is the 21st time the leading IaaS vendor has dropped prices since AWS launched its cloud in 2006, and I don’t think this will be the last.  AWS also released a new series of Elastic Cloud Compute instances with high input/output qualities.  AWS says this means they are optimized for media encoding, batch processing, caching and Web serving.

Cloud providers are clearly racing to the bottom in terms of best pricing, understanding that many enterprises are more price sensitive than expected around storage and compute services.  Much like the airlines, the AWS price reduction will have to be met by other IaaS providers, including Rackspace.

As long as the service levels remain consistent, the price reductions are good news for those moving to public cloud services.  Even a 2 cent drop in hourly pricing could translate into hundreds of thousands of dollars for enterprises that are heavy public cloud users.  Moreover, it’s much easier to make the business case for public clouds as prices continue to fall.  Right now, sometimes public cloud computing is cost effective, and sometimes it’s not.

Prices will continue to fall over the next several years, driven by pressure to capture the emerging market.  Also, as new cloud services come on-line, they will differentiate themselves by price to compete with the existing über players, such as AWS.  Overall, this is a net positive for enterprise looking to adopt public cloud computing.