Digital Ocean is a great company in a brutal, low-margin industry. Based on having run a similar (now mostly defunct) company in the past, I would guess that 80% of their customers are on the $5/mo plan. That $5/mo has to cover the hardware costs: you're buying expensive physical servers to put the VPSes on, and lots of SSDs too. SSDs have a limited lifetime measured in writes, and some of your customers will leave b…
Cloud hosting is not low margin. But DO cannot have the monopoly margin enjoyed by AWS and alike. One example, the hardware cost for AWS probably will be significantly cheaper than DO. That alone can sentence Do to death. And frankly, DO is better at UX, its technology is not innovative in any measure. By definition, that's a death penalty to a firm of its size.
Cloud hosting is low margin. You sell IaaS at about the cheapest possible price point you can. That's the very definition of low margin. Economies of scale don't enter in to whether or not it's a low margin business, they only define how competitive you can be in a low margin business.
IaaS is not where you make the money. The margins have to be tight to be competitive because that's the dollar value people see first when evaluating your cloud platform. It has an immediate effect from day one.
The profits are not made on IaaS, but on the PaaS and SaaS solutions that you, as a cloud provider, build on top of the IaaS. Things like your DBaaS, Streaming, Functions, Load Balancers, Data warehouse etc. products.
Once they're on your platform, that's when you try to get them to pivot. "Why spend engineering effort on running and maintaining database servers, when we can do it for you immediately?" Of course, then once they're using your value-added solutions, they start to get towards vendor lock in, every business's favourite situation. A customer that can't leave!
It's a difficult balancing point, you want to make it seem to the customer like they can realistically leave any time they want, but you don't want them to so you do just the absolute bare minimum you can get away with to make it seem like they're not locked in to your platform.
It seems like it took Digital Ocean a long time to realise that they need the SaaS and PaaS components if they're going to be in this for the long haul. When we launched Oracle Cloud Infrastructure some 3 1/2 years ago, we launched with features that Digital Ocean hadn't yet bothered with, and we were trying to launch with what was seen as the bare minimum to be a viable cloud product.
DO only added load-balancers in 2017, https://techcrunch.com/2017/02/14/digitalocean-launches-load..., and a Block Storage service in 2016. That's (in both cases) 8 years after AWS launched EBS (2008) and ELB (2009).
Prior to those services existing, it was relatively easy for any customer to just drop Digital Ocean for another cloud provider, but even those services aren't a big lock-in for customers.
I sincerely hope it's not too late for them. I like Digital Ocean. They really shook things up when they first hit the market, by bringing something a little different to the plate, but that was never enough to survive and it seems like they only relatively recently realised that.