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Putting Amazon's spot pricing in perspective

In a trend-setting move, Amazon Web Services announces its new spot-pricing option. It may be exciting, but it is important to keep perspective: Amazon--not any market--is still setting the price.

As reported on CNET, Amazon Web Services has announced a new pricing option that lets its customers take advantage of spare capacity within the EC2 infrastructure at variable, supply-and-demand-driven pricing.

The news has taken the cloud community by storm. For some, it represents the beginning of a long-anticipated move to market pricing for core IT infrastructure services.

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While there is some truth to the importance of AWS spot pricing to the history of cloud computing, let's keep things in perspective: this pricing is set by Amazon, not any market. We are a long way from a true commodity market for any form of cloud computing service.

Before I go any further, let's review how the feature works:

  • Each customer sets a maximum price he or she is willing to pay for "spot instances."

  • Amazon sets a "spot price" for instances hour-by-hour, based on available supply and demand.

  • Customers pay whatever the spot price is up to their maximum price. So, if someone bids $0.07/hour, and the spot price is $0.05/hour, the person pays $0.05/hour.

  • If the spot price exceeds the customer's maximum price, the customer's instances are terminated.

Spot pricing is the third EC2 pricing option, joining existing on-demand and reserved instance options. The first two options targeted two critical-use cases for cloud computing: reserved instances for mission-critical apps where capacity must always be available to meet demand, and on-demand pricing for just about everything else.

However, the success of both options likely left Amazon with a big problem: excess capacity. The success of reserved instances means that Amazon has to keep around enough capacity to guarantee that it can handle any spike in demand that might come along. The success of on-demand pricing means that Amazon has to build out new capacity fast enough to stay ahead of the voracious demand curve.

So, what to do? Enter spot pricing. Amazon's new pricing is an incredibly creative way to encourage consumption of unused data center capacity, by providing that capacity at clearance sale prices on the condition that Amazon can take it back at a moment's notice. For the right kind of applications, it's a true win-win situation.

Why not profit from what would otherwise be a liability?

Note, however, that this feature is not market-based pricing. Amazon determines the spot price and can raise that price enough to gain back capacity at will, at no real cost to itself. There is no competition. There is no commoditization. There is just consumption of what is not being used.

The truth is, real commoditization of infrastructure services--or any other cloud service, for that matter--isn't in the best interest of Amazon or any other service provider.

Regardless, commoditization can't happen without open standards that allow easy portability and interoperability of data and code, as well as security, control, service-level assurance and compliance systems. Those standards are coming, but it is impossible to predict when they will arrive. I only hope Amazon embraces them when they do.

In the meantime, we can watch with admiration how the success of Amazon Web Services allows it to explore the future of IT with the enthusiastic help of a customer base that truly benefits from each success. I can't wait to see how customers choose to take advantage of spot pricing.