After both Google and Amazon announced dramatic price cuts for their cloud infrastructure services last week, Microsoft has followed suit, saying it will reduce the price of rentable virtual compute power by up to 35% and storage by up to 65%.

Amazon Web Services, having been in the Infrastructure-as-a-Service game the longest among the three, has the largest market share. Both Google and Microsoft have had Platform-as-a-Service offerings for a few years, but have started offering raw compute and storage as a service only recently.

Still, because of the size of Google's and Microsoft's data center infrastructure, they are both major competitive threats to Amazon in this space. As the three giants battle it out, their massive price cuts are sure to have an effect on other IaaS vendors who are now likely to look for ways to slash prices as well or to think even harder about differentiating themselves through features and services.

Besides reducing the price of its most memory intensive Linux instances by up to 35% and Windows instances by 27%, Microsoft is adding a new type of instance. This is a new tier of its existing General Purpose instances.

The new instance, called Basic, is similar in configuration to the standard instances but does not include load balancing or auto-scaling features and costs 27% less, Steven Martin, general manager for Microsoft's Azure cloud services, wrote in a blog post announcing the news.

Prices of Azure Block Blob storage will be reduced by up to 65%.

Martin attempted to diminish significance of the price cuts in his blog post, saying innovation and quality are what will matter the most in the end. “Innovation and quality will prove far more important than commoditization of compute and storage,” he wrote.

“Vendors will ultimately extol their track records for building and running services far more than their prices and SLAs.”

As the technology giants compete on cloud prices, it is important to note that the way they use and build data centers differently than others. Bailey Caldwell, VP of business development at RightScale, a cloud management company, said companies like Google, Amazon or Microsoft have other reasons to build data centers besides supporting their cloud services.

All three had developed massive data center footprints and advanced in-house data center design and build capabilities to support other products and services. Amazon has its e-commerce website; Google has its plethora of web services, and Microsoft has its software products and services.

Neither of them are building data centers just to provide IaaS. They are just dedicating some existing capacity for that purpose, in contrast to companies that just provide cloud services and build out data center capacity specifically to support them.

“Having cloud be an offering that's part of your overall technical footprint is an interesting advantage in my mind,” Caldwell says. This advantage is what puts them in the position to take such extreme measures in fighting the price war.