Perhaps the biggest threat for most cloud service providers (this side of Windows Azure) is the ever looming competitive threat posed by Amazon’s cloud computing service.

Amazon has made a fortune out of selling products and services at razor thin margins.

Early this week it did again what it does best — the company announced a new price reduction of up to 27.7 percent for its lowest cost option, the Elastic Compute Cloud Reserved Instances running Linux/UNIX, Red Hat Enterprise Linux and SUSE Linux Enterprise Server.

The amount of discount depends a fair bit on the location, memory and CPU footprint of the instance, but this is clearly the latest in the ongoing cloud price war.

It was just Last November both Amazon and Google steeply slashed prices to their storage service. Not the one to be left behind, Microsoft’s Windows Azure was forced to do the same soon.

And more importantly, this will only widen the price difference gap between Linux offerings and Microsoft’s cloud technologies, at least on the public cloud.

One apparent aspect of this move is to reinforce the perception that it is cheaper to run Linux than Windows on EC2. There is no reason to doubt that Amazon considers Microsoft and Windows Azure its biggest competitor.

This move could potentially sway users not just to Amazon’s cloud itself, but away from Microsoft technologies.

For now, Microsoft can afford to play a bit of a waiting game, owning to its large size and corporate footing. But Redmond will have to follow this up one way or another or risk losing a fair fraction of its Windows Azure customers, new and old, regular or potential.

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