Gaming the Amazon Spot Market

Amazon Web Services announced a couple of days ago that they would be auctioning off excess compute capacity in their cloud. This is a huge deal for a bunch of reasons … but I’m really interested in what’s in it for entrepreneurs like me.
Here’s the thing: the prices so far are bargain basement: a small EC2 instance that typically costs $.10 per hour fluctuates between $.026 and $.036 an hour. The price you pay is whatever the current spot rate is … even if your bid is higher than that.
The use case Amazon suggests is bidding for this unused capacity to handle batch processing that is not time-critical. But since the price so far has never risen anywhere close to the “rack rate” of .10$/hr, placing a high bid (say for $.12/hr) should allow you to have access to amazon compute resources at drastically reduced rates (currently between 25% and 35% of current rates).
Of course, my perpetual high bid will help keep the prices from dropping too low on the spot market, and I’m sure Amazon appreciates that. From the perspective of the spot market, I’m a sucker. It’s only from the perspective of someone who needs compute resources on a constant basis that I’m getting a good deal. But a 50%-75% discount on my servers in exchange for a simple change is nothing to sneeze at!
One caveat: I’m assuming that prices on the spot market will never rise much above the “rack rate” for servers. This seems like a good assumption, since if they ever do users can always instantiate those servers instead of the ones on the spot market. But these are early days for computing as a real-time commodity, and no one really knows what this market will be like.
I’ll keep you updated as we at SlideShare experiment with this exciting new pricing model … we’re going to switch half of our conversion servers over to the spot market first, and see what happens over the next several weeks.

Why Amazon Reserved Instances don’t make economic sense for startups

At slideshare we spend a LOT of money on Amazon Web Services, especially EC2. We love AWS because the pay-as-you go pricing model means that we never invest in servers that we aren’t ready to use yet. But earlier this year, Amazon released the ability to prepay for a “reserved EC2 instance” (see my initial reaction here). In exchange for paying a fee, you get the right to consume instance-hours at 1/3 of the standard rate. You can do this for either one or three years (three years simply requires a larger fee). The pricing of both reserved instances and standard instances have recently been discounted.
I was curious whether this would be a good deal for slideshare, so I modeled out the cost over a three-year period for one large instance. I modeled 3 scenarios:
1) paying as you go (the way we do currently)
2) paying the 1-year reserved instance fee every year
3) paying the 3-year reserved instance fee
The discounting is identical across different instance types (I spend a little time double-checking this), so my conclusions should be relevant to you even if you use small or medium instances.
Here’s the spreadsheet.

The results surprised me quite a bit. Some quick observations:
1) Amazon bills at the end of the month (after usage). But the prepay happens at the beginning of the month (before usage). This pushes out the “break-even” point for an investment in a dedicated instance 1 month further than you might think. For the 1-year plan (the only one worth considering IMHO) this happens in the seventh month.
2) Discounts are not as generous as they appear. As a result, it ONLY makes sense to consider a dedicated instance for a machine that will be running 24 hours a day, 7 days a week.
3) Amazon pricing is rapidly being discounted. Locking your prices in for 3 years is almost certainly not beneficial to you at this point, given the small spread between the discounts (the difference is 18%. Given Amazon’s track record, betting that they will not discount their services by 18% in the next three years is very risky).
4) A 30% a year discount (which is what you get with the one-year prepay option I model) will certainly be attractive to many small businesses or larger companies. After all, a 30% yearly return on an investment is pretty good. But a startup will almost always have something else it can invest in that will pay better than 30%/year. For us it’s engineering: the faster we can improve the slideshare experience, the more money comes in the front door for us. The cash flow properties of amazon’s core pricing model (paying for the infrastructure you need after you use it) are pretty darned hard to beat.
Conclusion: 1-year instances may be a good choice for many customers. But most venture-backed, bootstrapped, or rapidly growing companies should just stick with the default Amazon pricing. So we won’t be investing in Amazon Reserved Instances right now. We’ll just rely on the steady discounting from Amazon to drive our infrastructure costs down over time.