Amazon Web Services cuts through cloud costs, red tape

By simplifying pricing for Reserved Instances, AWS hopes to fend off competition and retain customers stymied by its arcane cost structure

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Few cloud customers are fans of the cost structure for Amazon's EC2. With its maze of instance types, reserved-vs.-on-demand pricing, and arcane "compute units," figuring out how much EC2 will ultimately cost you has long been an exercise in grief.

Earlier this week, Amazon took a small step toward demystifying EC2 when it simplified the pricing for EC2 Reserved Instances. Instead of being tiered by usage, Reserved Instances are now tiered by how much of an upfront payment customers are willing to make for a one- or three-year usage plan.

Pay now, compute later

Amazon now allows EC2 users to pay upfront over time for Reserved Instances, rather than EC2's conventional pay-as-you-go model. The new model gives users three options: pay everything for a given period (typically one year) upfront; pay half upfront and half later; or pay through monthly installments. In all cases, the instance types are the same as the Heavy utilization instances from Amazon's previous Reserved Instance model.

The main reason businesses use Reserved Instances is to save money, especially as the per-hour compute model becomes less useful to both cloud vendors and companies that use the cloud. After all, why pay by the not-very-predictable hour when you can budget by the quarter or the year?

But Amazon offered Reserved Instances in the first place as a bulwark against competition, as its rivals rolled out not only lower prices but more creative services. Amazon has been able to keep its price edge over competitors thanks to Reserved Instances, but Google's relentless price-cutting and innovation on new technologies like application containers are forcing Amazon to keep up.

How much cost savings can users expect from the new Reserved Instances? A fair amount, as long as they're buying as much upfront as possible. According to an analysis by cloud-management vendors RightScale, the new Reserved Instance pricing can run anywhere from 25 to 38 percent cheaper than a comparable Google Sustained Use instance -- for a three-year partial upfront instance, a major commitment. For a one-year all-upfront instance, the savings is only 5.56 to 10.85 percent. For one-year no-upfront (month-to-month) pricing, Amazon's costs are 11.11 to 30.36 percent percent more than Google.

RightScale noted, "AWS has offered even larger discounts for a three-year term on RIs. However, during that three-year term, customers should consider that there may be significant price cuts in on-demand usage as well as the launch of new, more powerful instance types."

Saving both money and headaches

It seems unlikely that many Reserved Instance users will shed tears over the fact that Light and Medium instance types have been phased out in the new model. Cloudability, makers of a suite of cloud cost-management tools, claims that "across all the Reserved Instances that we track for customers, only 14 percent are Lights and Mediums." Consistent billing was also a big draw, as Cloudability noted that its customers felt "the ability to pay for the entire reservation upfront would simplify the buying process significantly."

J.R. Storment, co-founder and chief customer officer of Cloudability, believes Amazon's chief reason for changing Reserved Instances was customer feedback, but also thinks the new purchasing system could aid Amazon's move into enterprise IT. "The all-upfront purchases align closely to enterprise procurement processes, making cloud easier for traditional enterprises to understand," Storment wrote in an email. "[Reserved Instances] are easily the most popular cost-reduction tool available from AWS, and that's unlikely to change with the new announcement. If anything, the new simplicity of buying reservations should increase their usage."

Changing up the Reserved Instances cost structure hints that Amazon can continue to compete in ways other than slashing prices. Because many of its offerings are still so arcane, Amazon can restructure them and make them more appealing. But that strategy is more likely to keep existing customers satisfied than to attract new ones.

That said, prices alone are rarely a good reason to pick a particular cloud vendor. One case study has alleged it's cheaper to run your own private cloud if you're spending more than $7,600 a month on Amazon's services. And InfoWorld's David Linthicum has noted that time-to-market and agility advantages should be the prime reasons to adopt the cloud, not only cost savings.

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