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Confluent Has a New Low-Cost Competitor

Motley Fool - Wed Oct 11, 2023

Any company with even a moderately complex cloud-based IT infrastructure is going to run into problems if it doesn't have some sort of "glue" that holds everything together. Apache Kafka, a popular piece of open-source event streaming software, is often used as that glue. Kafka enables asynchronous communication between different systems without tightly coupling those systems together.

One downside of using Kafka is that it's complicated. You can install Kafka anywhere and manage it yourself, but if something goes wrong, it's up to you to fix it. Kafka is cheap to run but costly to manage and maintain, both in terms of time and the potential for lost data.

Confluent(NASDAQ: CFLT), founded by the creators of Kafka, provides a serverless platform that eliminates many of the headaches involved with running Kafka while layering on proprietary features. Confluent's platform clearly resonates with its customers. The company grew total revenue by 36% in the second quarter, and the cloud-based product saw revenue soar 78%. There's clearly plenty of demand for a managed version of Kafka with most of the hassles removed.

Competition heats up

Confluent is not the only provider of managed Kafka services. Most major cloud computing providers offer their own version of a managed Kafka product. Amazon Web Services offers its Managed Streaming for Apache Kafka service, and Microsoft Azure offers Azure Event Hubs for Apache Kafka. There are also start-ups and privately held competitors, including Upstash and Aiven.

Many of the available options are tailored for enterprises, not small businesses. They also tend to be expensive. Confluent's cloud product starts at about $1,000 per month for the standard plan. No wonder many small businesses choose to self-manage Kafka and accept the downsides and risks.

DigitalOcean(NYSE: DOCN) has been slowly rolling out managed services over the past few years, including databases and servers through its acquisition of Cloudways. The company is now jumping into the managed Kafka market, launching its own take on a managed Kafka service late last month. Sticking with its general strategy to keep things simple, the company has launched this service with transparent and aggressive prices.

DigitalOcean's managed Kafka plan starts at $147 per month and scales up based on consumed resources. Unlike the large providers like AWS, that's the only charge involved. AWS's serverless Kafka offering has separate charges for the Kafka clusters, horizontal scaling, storage, and bandwidth both in and out. Confluent's pricing is simpler but out of reach for those without large IT budgets.

DigitalOcean is presenting itself as an alternative for small businesses that manage their own instances of Kafka but can't justify the high cost of a typical managed service, or for those that begrudgingly pay up for a high-cost service. By expanding its array of high-value cloud products, DigitalOcean can continue to push up its average revenue per customer and make its platform stickier. And this entry into the managed Kafka market could help the company win brand new customers who hadn't considered the developer-oriented cloud platform in the past.

Confluent is mostly focused on enterprise customers, so its business is unlikely to suffer at all in the short term. But as enterprises look for ways to reduce their cloud computing bills as economic uncertainty ramps up, DigitalOcean's low-cost Kafka service could be appealing. Confluent has the advantage of being founded by the developers of Kafka, which is certainly a powerful sales pitch. But in a tough economy, low prices may start to win out.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Timothy Green has positions in DigitalOcean. The Motley Fool has positions in and recommends Amazon.com, Confluent, DigitalOcean, and Microsoft. The Motley Fool has a disclosure policy.

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