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.

3 thoughts on “Why Amazon Reserved Instances don’t make economic sense for startups

  1. Rashmi December 3, 2009 / 1:17 pm

    Why don’t you embed this as a Google doc? Would be nice to view it in the context of the post

  2. Sachin Rekhi December 3, 2009 / 1:55 pm

    The nice thing though about reserved instances is that it applies to any box of the same spec. So I think it’s still useful to get the 1-yr instance for a certain number of boxes if you have a web server farm or set of boxes that will always be running. Maybe for say 25% of your expected capacity, since you know you’ll always have at least X boxes of a certain instance running, then you can save money that way.

  3. Asher Bond September 25, 2010 / 12:23 pm

    For 24/7 it makes perfect sense and I think these are the people being targeted. It makes sense for web software dev because you start out small and learn to scale the app layers before you go to m1.small or m1.large…. I’m also experimenting with auto-scale clustered t1.micro using custom images. That’s a nice way to spin it. [:

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