We knew it was going to happen but perhaps not so soon. Today Amazon announced that it would be reducing it’s pricing on EC2 linux instances by 15%. That’s a pretty significant cost reduction but we also have to factor in a whole bunch of other costs to figure out what their strategy seems to be.
Unlike with most bundled VPS services where you get a certain amount of disk space, bandwidth, memory and CPU resources, the Amazon model breaks things down into separate categories. You pay per use on everything. Instances per hour, Bandwidth and Storage per Gig, etc. Under this model it makes sense to shift your revenue to things that are higher margin. What that means is that with enough scale, you could almost afford to break even on the server instance and make money on other things – like bandwidth.
This is similar to the concept of “Freemium” in the Web Apps world. You get to use the basic version at a heavy heavy discount (in some cases free), but the add-ons, extra functionality, etc results in having to pay. The difference is that in the harsh reality of hosting, it costs real money to run a server.
