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Amazon EC2 Reserved Pricing Changes the Equation

Cloud Computing Economics Part Three

Ulitzer Cloud Computing Blog

Things are changing fast in the world of Cloud Computing, however one question remains the same. Will it save me money and how much? To follow up on a previous post on Cloud Economics Part One, I looked at a fairly simple example of 5 Servers for a dev/test environment and identified the incremental costs of buying 5 servers and running them on premise or a Colo and then compared that to Amazon EC2. The analysis did not include many variables such as real estate costs and labor savings which may or may not apply to the particular situation. The results indicated that a Premise based deployment could provide the lowest "incremental" cost when compared to EC2 if the servers were running continuously. On the other hand EC2 provided significant savings for short term workloads with no upfront costs.

Purchase - on Premise

$ 15,000    Quad-Core Servers ( 5 x 3,000 each  )

$ 750         1/2 Rack + Gigabit Switch

$ 15,750   Total Hardware cost

$ 5,800     Annual amortized cost, 5% over 3 years

$ 0              Assuming no incremental real estate cost

$ 2,000     Annual power & AC cost

$ 7,800 Total annual cost on premise

Purchase - at Colo

$  8,000    Colo fee's; 1/2 Rack + power + bandwidth

$  5,800    Annual amortized cost

$ 13,800  Total annual cost at Colo

EC2 Cloud

$ 35,040  24x365x5 Amazon EC2 ( $.80 per high CPU Server instance hour )

$  8,320   40 hours x 52 weeks

$    688    40 hours x 4.3 weeks

What has changed recently at Amazon is a new pricing model that provides the option for "Reserved Instances" which includes an upfront fee ( 1 year or 3 year term ) and a reduced per hour charge. The analysis below reflects the new pricing model applied to the same 5 server scenario as above. As indicated the new model results in a significant savings compared to EC2 standard pricing; 31% for the 1 year term and 48% for the 3 year term assuming the servers are running 24/7. However, when compared to the 40 hour per week scenario the cost at $16,146 ( or $10,229 3 year ) is higher than the EC2 Standard price of $8,320 or the Premise cost of $7,800.

Annual $               Reserved Pricing at EC2

24,162     24x365x5 ( $.80 high CPU ) 1 Year Reservered, $2,600x5 @ 5%
18,245     24x365x5 ( $.80 High CPU ) 3 Year Reservered, $4,000x5 @ 5%
16,146     40 hours x 52 x 5 ( $.80 High CPU ) 1 Year
10,229     40 hours x 52 x 5 ( $.80 High CPU ) 3 Year

So will the Cloud save money? the answer remains the same ... it depends. The new " Reserved Instance" pricing model provides substantial savings over standard pricing when used continuously but the standard pricing still is more effective for short time periods such as a 40 hour week workload. As noted in the earlier posts there are many other variable cost savings by putting workloads in the cloud such as real estate costs, facility upgrades plus the intangible but real benefit of reduced time to develop/test/deploy.

The "Reserved Instance" pricing will also impact the variable workload analyzed in Cloud Economics Part 2 - Premise Plus Cloud scenario, this should provide more content for an upcoming post. 

Cloud Economics Part 1 here.
Economics Part 2 here.

More Stories By Chris Fleck

Chris Fleck is Vice President of Emerging Solutions at Citrix Systems. Chris started his career at IBM working across multiple engineering and product organizations leading to Business Unit Exec of the IBM Industrial Computer Group. As a pioneer of new technologies, Chris founded an IBM spin-off to commercialize the initial Server Blade products as CEO of OmniCluster Technologies. At Citrix Chris is responsible for Emerging Solutions. As part of the Citrix CTO Office he is also involved with or leading multiple strategic initiatives at the company. You can follow him on Twitter and his blog at

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