As cloud costs climb, can homegrown cloud providers save the day?

by MMC
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With the Naira in free fall, Nigerian startups face rising bills for cloud services, which they mostly use to store critical data. These cloud fees and staff salaries are typically the two biggest expenses for startups, and some founders have argued that Nigerian companies need to move to homegrown cloud providers.

Cloud computing costs are charged on a pay-as-you-go basis, with startups paying monthly for the computing they use. Startups also pay for backend and mobile application computing costs. These costs can vary widely depending on the company.

In late 2023, Incentro, a Google partner, sued Twiga, a Kenyan e-commerce startup, and asked a court for help in collecting a debt relating to a $2 million cloud services contract. According to the terms of that contract, Twiga could pay as much as $84,000 per month for cloud services.

While that is already substantial, currency devaluation and FX volatility in Nigeria, where many startups earn revenue in Naira, make that fee even more expensive.

In mid-2023, Nigeria removed all artificial controls on its FX market to unify its official and parallel market rates. While the CBN was hoping for stability, the value of the naira has continued to slide, reaching new lows this week.

As a result, a $1000 cloud service that would have cost ₦458,000 in early 2023 is now about ₦1.52 million, a 107% increase.

One Nigerian HR-tech startup that runs different servers for its client pays up to $80,000 in cloud costs monthly, according to a person familiar with the company’s operations. Another Nigerian financing startup pays around $2,000 monthly, an employee who asked not to be named told TechCabal.

Nonso Eze, the CEO of Tradebuza, whose startup connects smallholder farmers to financing, said his company is exploring given the rising cost of their USD-denominated cloud fees.

The big three cloud providers

Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform are the three biggest cloud computing companies in the world. They remain the top choice for many companies and offer free cloud credits to early-stage and growth-stage startups. Google, for instance, gives startups up to $200,000 in Google Cloud credits to startups through its Black Founders Fund

while accelerators like Techstars and Y Combinator give their portfolio companies cloud credits.

When the cloud credits eventually get exhausted, the startups will have already built some of their core infrastructure on the cloud and are locked in, making it difficult to switch.

Abolore Salami, a founding partner of Business Lab Africa (BLA) and a long-time AWS customer, says there has never been a downtime in over five years of using the cloud provider, emphasizing the stability expected from cloud providers.

In January, Salami put out a poll on LinkedIn to find out how many founders were also affected by rising cloud costs. More than half of the people who participated in the poll said it was worrisome.

Is “going local” viable?

A seemingly obvious way out for startups is to transfer these costs to their customers, but the fear of churn in competitive markets makes this a challenging choice.

Adedeji Olowe, CEO of Lendsqr, a lending-as-a-service company, told TechCabal that startups could seek out local alternatives that have built some resilience into their infrastructure. Some local players include Nobus Cloud Services, MainOne Cloud, Web4Africa, Galaxy Backbone, Layer3 Cloud, and many others. Indian-based Zoho Cloud is also positioned as a local alternative because it accepts naira payment.

While local options exist, there are concerns about their ability to replicate the full feature range of big cloud providers because they don’t own their infrastructure and rely on open-source platforms like OpenStacka cloud expert who asked not to be named told TechCabal.

AWS, for example, offers microservices—which break down a large application into smaller independent parts.

“When you don’t have complex infrastructure, providing cloud services won’t be as easy as people think it is,” he said.

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