Amazon Spot Instances: How much do you want to pay for EC2?

Amazon now offers Spot Instances of its EC2 cloud, which means you could pay less than standard price -- or a lot more.

Amid a wave of end of the year announcements, Amazon Web Services has debuted another potential game-changer for cloud computing; a futures market for its own commodity, EC2 computing power. With a price that starts at two-thirds the normal EC2 cost, Spot Instances, as AWS calls them, fluctuate in value at Amazon's whim. Users decide how much they are willing to pay, and instances are cut off when the price exceeds their bid and reactivated when the price falls.

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A Linux m1.large instance, for example, is normally $0.15 per hour. It starts at $0.11 per hour on Spot Instances but ran as high as $1.00 per hour for brief periods last week.

Amazon says the service is aimed at computing jobs that aren't time-sensitive and can stand interruptions. Analysts say that Spot instances are a potential goldmine for IT departments that want to control costs and a clever way for Amazon to shape demand on its infrastructure and increase profits.

"Maybe I'm doing some retrospective analytics, I'm a big credit card company," said Bob Shear, president and CTO at software consulting firm Greystone Solutions.

In that case, said Shear, he doesn't need results as fast as possible and it's not a frontline operating cost. Spot Instances would then be a great way to save real money in IT costs, as an operator could calculate the time and resources needed and only use EC2 instances when they met the cost guidelines. Shear likes the idea but called it immature at this point.

Spot Instances, he said, were like airlines that undercut the price of seats on chronically empty flights and sell them to the highest bidder. That's how online travel sites like Expedia or Priceline operate. Airlines already have to pay to fly the aircraft, and if they know seats are going to be empty anyway, they'll undercut their own prices to recoup some of that operating cost.

"Just like airline seats, [Amazon is] going to let people bid for time," said Shear.

"What's really going on is that Amazon wants to encourage [users] to not run during peak hours," said James Staten, principal analyst at Forrester Research.

He said Amazon is able to do two things with Spot Instances: Recoup wasted operating costs by encouraging off-peak usage with cheap prices and manipulate demand to ease the load on EC2 infrastructure as it nears capacity during normal business hours.

"I fully expect them to fluctuate these prices based on the demand they're trying to drive," said Staten. But they have to balance that against demand, which, he added, is growing like a weed.

Staten envisions Amazon encouraging arbitrage to move loads from near-capacity data centers to newer, emptier ones.

"US East [the Amazon EC2 Region based in Northern Virginia] is pretty much full, right?" said Staten. "Over time, US East will never get as inexpensive as US West," and economy-minded users will shift workloads to follow the lowest cost.

"It's a pretty good opportunity for clients to optimize costs," he added.

Enterprises are long used to hunting for bargaining in fluctuating costs, said Staten, from telecom service to jet fuel, and this is another big step in turning the promise of fully commoditized cloud computing into a reality.

"The one thing you didn't get already with Amazon's pricing was the factor of time-affecting costs."

Staten said that Amazon's "futures market" is a win both for Amazon, as the company is once again proving it can make money where there was none before, and customers, who could cut EC2 bills by one-third or more if they're smart. But that's just the beginning.

"Unlike a regular spot market where you'll find lots of competitors, there's only Amazon, so they'll never go beyond profitability," said Staten. But that won't last.

"I fully expect four or five [cloud providers] to go down this path," he said. Users will then have a real speculative market for compute resources, and everything from pricing to the call for interoperability standards will suddenly become much more interesting.

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