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.

Today the Canadian Government released a brief on the opportunities for Canada in Cloud Computing. It’s a great paper that highlights some of the benefits and strategic advantages of building large cloud computing centers in Canada. I’ll jump straight to the conclusion in the article: Canada is one of the BEST places to build out data centers and cloud computing infrastructure. The article mentions a bunch of reasons – I’ll expand on a few.

Geography & Climate

Most of the costs associated with running the 1,000′s of servers is directly associated with the price of electricity and the cost of cooling. Canada has cheap, renewable electricity & it’s colder. That means you can offer competitive services at better margins than someone running a cloud in the hot Nevada Desert. Michael Geist wrote more about it at Clean Cloud Computing.

Legal Reasons

Not only are many Canadian companies required to keep their data on native soil, the privacy and electronic documentations act means keeping information here is a really good idea.

Reliable, low cost, renewable energy

The BC, PEI, and Quebec governments actually have the cleanest and lowest cost per KWh electricity prices in all of North America. That’s possible through the use of hydro-electric dams, which also have an extremely low carbon footprint. As stated previously, the cost of running your servers is mostly the cost of electricity.
Cheaper electricty = Competitive Cloud

We’re right next to the American market

One of the fastest computer networks in the world, funded in part by the Canadian government, already runs through most of Canada. We’re also right next to the American market. That means North Americans can’t really tell if their servers are in Nevada or Nunavut. From a consumers perspective, there would be no reason not to use a Canadian Cloud that’s cheap, secure, and efficient, and we would be able to export a utility that is higher margin than say, electricity.

All in all I’m really excited by this report, and I’m sure that more people will be thinking about the potential Canada has to become the world leader in cloud computing services. You can get a little more background information, and learn more about the suggested ways forward by reading the brief here “Cloud Computing and the Canadian Government“

Behold Sinners! The Apocalypse Aproacheth. No in all seriousness if you run a managed hosting company then your time is officially ‘up’. You won’t survive the coming hosting Apocalypse. Here’s why.

There are a few companies you may have heard of building large compute grids for consumption by the general public. They’re calling them their Cloud Computing products. IBM is building BlueCloud, Microsoft is building the Mesh, Amazon already has EC2, and Google has AppEngine. AppEngine is in a slightly different category than the others and the BlueCloud details are sparse, but they’re still worth mentioning. Of more immediate interest are Amazon and Microsoft’s solutions.

Microsoft is currently building their famous 300,000 server Data Center in Chicago. That’s roughly 3 times the number of servers that Google has. Microsoft has also announced several other Data center projects – each worth about $500 Million. It’s fair to say that that’s a lot of computing power, and it’s not all for MSN – Microsoft is planning on providing their platform in the cloud.

The real question is what Amazon will do when the Windows Cloud comes online. Microsoft has enough money in the bank to provide their 300,000 servers to customers for *years* without earning a single cent. That implies they can offer services at super low rates; Low enough to at least compete with Amazon’s EC2, which will support the Windows Server OS in fall 2008.

What happens with two huge cloud hosting companies get into a price war?

In the interest of self preservation they won’t make their services commodities – at least right away. But it won’t even matter. When you’re as big as Amazon, Microsoft, Google or IBM, you can afford to buy servers in such massive quantities that you could make money selling compute time for 10$ a month. The hosting space will change forever, because Amazon will eventually drop their prices by an *order of magnitude* and that has dire implications for the rest of the Mom’n'Pop hosting companies.

If thousands of companies can’t compete with Microsoft or Amazon on price, and they can’t compete in terms of convenience, then why would anyone use them? If you have to buy individual servers, or even servers by the rack, then you’re not going to get the price you need to be able to compete. You also don’t have access to the handful of specialized individuals and hardware required to make things work on such a grand scale.

The only answer is for all the smaller players to band together – to create a Federated Hosting environment, where together they can provide services that begin approaching levels of service and power that the Big 4 will offer.

Either way, we’re in an interesting period in the industry. Computing and the infrastructure of technology has become such a requirement for the economy that it will eventually become a general utility. The real question is who will be around.

Do you think it’s the end? We’re working on the answer, and your opinion is important.

There are a lot of ways for companies to bootstrap, and even more companies and partners willing to lend a helping hand if you know who to ask, and where to look. One of the companies that’s willing to help is Sun Microsystems.

Through their Startup Essentials program, companies can get access to Sun gear and resources at heavily discounted rates. That’s great, because Sun gear is pretty much the best out there, and being competitive with other companies like Dell and HP on price will help get their technology into more Data Centers and up and coming businesses. But like all shiny objects, servers lose their luster. Even if they’re free.

In order to run a server you have to secure colocation space, pay for bandwidth, buy some switching gear and a router, and depending on your setup get UPS power. Sure you can get cheap switches to connect your high-end servers, but depending on your work load it would be like running a jet engine on bacon fat.

If you’re running more than a few servers you’ll probably need to get more than the standard ~3000W/Rack – especially if you have a SAN device. That means one full rack with extra power. Most older data centers don’t have the cooling capacity to handle todays dense and powerful systems, so your full rack will probably be half full (if you’re lucky), then you’ll have to get another rack if you want to expand. That involves more waiting. Average amount of time for a colo to provision a new rack? 4-6 weeks. You’ll also need to pay for installation, and every colo provides space on contract so you’re committed for a year. Time is money, and waiting 4-6 weeks to be able to expand your environment means you have less flexibility.

There are certain scenarios where getting colo still makes sense. If you’re running your own hosting environment *as a business* then obviously having the control over your environment is necessary. Companies with certain regulatory or security requirements will also need to stick with colo, but otherwise, why lock yourself into contracts and inflexible environments and hire extra staff to manage that operation, when you can just rent some servers en-masse and get super cheap bandwidth?

If you run the numbers you can get just as much if not more *power* for the same amount of money from companies like Joyent, Amazon, ServerBeach or Rackspace, and not have to worry about contracts. While it’s nice to have an awesome piece of kit, sometimes it isn’t worth the time or money.