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Amazon “Spot Pricing” for EC2 Changes Data Center Dynamics December 15, 2009

Posted by Peter Varhol in Software platforms, Strategy.
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How do you run an independent commercial data center as close to capacity as possible?  In the past, when we wanted to sell as much of something as possible to business customers, we would hire a big sales force and send them out to make deals.  Sure, our costs would go up as we had to hire and train salespeople, but the strategy was predicated by the assumption that the fortified sales force would sell more than they cost.

As we likely know through painful experience, it doesn’t always work that way.

Amazon has a better, or at least more interesting idea.  It is auctioning off “spot instances” of unused capacity in its EC2 cloud.  A spot instance is a server or set of servers that are temporarily not being used to capacity.  According to Amazon, the spot price changes periodically based on supply and demand for the excess capacity, and customers whose bids meet or exceed it gain access to the available spot instances.  Amazon describes the details of this program here.

The other side of the equation is that if the spot price rises above your bid, and there is a higher bid waiting for a server slot, you will lose your slot, and your instance will be terminated.

Ouch.

What kinds of applications might you want to put up for spot pricing?  Certainly not a mission-critical application running exclusively on EC2.  If you’re offloading some work from your data center, it’s got to be work that doesn’t matter whether or not you save the last bit of results.  It may also be useful for static page displays or other type of information that doesn’t change often.

Alternatively, a customer can make its bid high enough so that it becomes very unlikely that the spot price rises above it.  Because customers are charged the spot price, not the bid price, the bid price becomes the ceiling that the customer is willing to pay.  This makes it less likely the customer’s instance would be cut off, without necessarily increasing the cost.

Still, Amazon’s program probably represents the future of pricing and availability in cloud data centers.  It treats raw compute power as a commodity that can be publicly bid on.  By letting the market determine the price, Amazon hopes to fully utilize is cloud data center while maximizing revenue.

This model has plenty of room for refinement.  Right now, the spot instance program seems to be entirely automated.  One of the things that Amazon can do is to add a step where the algorithm notifies the customer that it is about to lose its instance due to changes in pricing, and provide it with a small amount of time to up its bid price before terminating the instance.

But expect this sort of pricing to grow in the future as IT consumers better understand how to best use it.

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