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Cloud pricing

Posted on Thursday, March 26, 2009 | 4 Comments

One of my 5 steps to prepare for Cloud is to understand your current cost model. After all, how are you going to know if the cost of a new service is attractive if you don't know what your current costs are?

What will the costs models of the new cloud services look like? Well many are yet to be seen but a large difference we are already seeing is moving from a fixed cost, whether that be monthly or annual to a consumption based pricing, only pay for what you use. Consumption based pricing is of course nothing really new, its has been around in many areas for a while, such as hosted storage or carriage. Although a slant on cloud based consumption is that it is not pre-provisioned.

Yet the consumption based pricing was one of the more visionary elements of Amazons EC2 service. Pay by the hour or pay by the Gigabyte. Thats they way people want to consume cloud services is what we keep hearing, pay-as-you-go.

Therefore it was interesting to see that this month Amazon introduced an additional pricing model, its called "Reserved Instances".

Reserved Instances give you the option to make a low, one-time payment for each instance you want to reserve and in turn receive a significant discount on the hourly usage charge for that instance. After the one-time payment for an instance, that instance is reserved for you, and you have no further obligation; you may choose to run that instance for the discounted usage rate for the duration of your term, or when you do not use the instance, you will not pay usage charges on it.
Reserved Instances can be purchased for 1 or 3 year terms, and the one-time fee per instance is non-refundable. Usage pricing is per instance-hour consumed. Instance-hours are billed for the time that instances are in a running state; if you do not run the instance in an hour, there is zero usage charge. Partial instance-hours consumed are billed as full hours.
So you can have pay-as-you-go or you can get a discount by paying in advance. People have even done the calculations to determine where the change point is to swap to the prepaid model. Sounds like the new pay-as-you-go model may not be as great after all if the old model of longer term contracts can bring the customer cost savings and the supplier some more predictable revenue stream.

What might the future hold for cloud pricing? I think the mobile phone market is a great example of where we will end up; too many plans which you can't really understand and compare, many different means of bundling and packaging. Pre-paid, account, big packages with large usage amounts included or small packages with hefty additional usage fees.

Where might this all end up? The day will come when the cable into your house will offer a number of different services. Today that cable offers television, telephony and internet services. Tomorrow it will add another service, compute resource, so you can throw away your home PC. It may not even run over Internet protocol, but some new remote PC protocol. You may get an amount of compute resource free as part of your package and then you pay-as-you-go for additional usage (one for each family member). 

I think the pricing models for cloud are going to get a little crazy, so you had better get ready and work out your current cost model in order to see how they all stack up. 



  1. Your point about knowing your cost structure is interesting -- 3 years ago people were saying they had to get their hands around this so they could implement chargeback models inside their companies. Now Cloud is the driver and you *really* had better know your costs for internal vs external cloud, because it's not just chargeback numbers on the spreadsheet, it's dollars out the door!

  2. @John. Indeed "dollars out the door". I did not highlight that reason but in the economic environment in the US this issue is probably a lot more in your face than here. Great observation. You are not going to jump tomorrow, its all about getting ready.


  3. Interesting postulation about the cable into the home also having a PC on the end of it... not sure where this stands from a Windows licensing standpoint (there's something wierd to do with offering XP desktops to 3rd parties which is why no hosting companies offer it currently), but is a great idea I think. You should suggest it to the parent company of your employer ;-)

  4. @Stu, thanks for the comment. Who says it has to be Windows, it could be Linux or OS-X. Of course VDI from the cloud is a vision for many and there may be ways to license this in the future if not today.

    Of course the real idea behind the example is the whole Carr utility computing. That cable into your home or office offers services, and compute is just another service. If I go back to my cloud definition "Remote Elastic Services" it fits nicely.

    My employer? This blog has been obfuscated so they can have no knowledge of its existence. If legal had to sign off any posts I would be announcing the release of Windows 3.1 next week. Actually thats not fair, legal rock and frequently surprise me, as much as lawyers can.



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