UPDATE (10/2009): Amazon has updated their reserved instance pricing as of August 2009. Please see my revised numbers and spreadsheets here: Amazon Reserved Instances Update.
Amazon just announced that they are giving an option to pay upfront for Reserved Instances on EC2. See Amazon CTO Werner Vogel's blog for more details.
I set out to understand the economics of Reserved Instances. For that purpose, I created a calculator that allows you to plug in the number of hours you expect to use the AMI during the year, and will then tell you how much money you will save or lose by using Reserved Instances versus pure On-Demand Instances. I share this calculator below as a embedded Zoho spreadsheet (if you cannot see it well, click on the full screen link on the top-right).
The way to use it is very simple. For each instance size, just plug in the number of hours you expect to use the instance during the year in the light blue cells. You will then get the results for both 1 year and 3 year contracts in the corresponding gray cells. If it's a positive number, that's how much you save by paying the upfront Reserved Instance fee. If it's a negative number, it's how much you'll lose.
The default number I put in the hours column, 8760, is 24x365. So if, for example, you run a Large AMI for the entire year non-stop, you will save $1,153 by using reserved instances.
If you are curious to know the break-even point, it is 4,643 hours annually for the 1-Year fee and 2,381 hours *annually* for the 3-Year fee. In other words, if you expect to run an instance for more than 4,643 hours during the coming 12 months (works out to an average of 12 hours a day), you're better off with Reserved, otherwise, stick to On-Demand.
Without further ado:
Feel free to download the spreadsheet, and if you find any errors in it, please let me know.
There are two more important considerations you should take into account in any ROI calculation for this:
- If there is any uncertainty with regards to the expected number of hours, you should take into account the probability that you will overshoot or undershoot the number of hours and create an Expected Value based on that. There are no refunds on the upfront fees!
- Consider the time-value-of-money of your upfront fees. In other words, what value could you get for that money by investing it in other areas of the business (or in U.S. T-Bonds for that matter). You should determine your "discount rate" and calculate a Net Present Value.
I admit I 'm somewhat obsessed with cloud pricing lately, but that's for two good reasons. First, as one of the main value propositions of cloud computing is cost savings, I think it is important that as an industry we examine what the vendors are doing and making sure we're getting it right. Second, for my own selfish reasons. I am working on several projects now where I either need to figure out the economics of using cloud for an end customer (i.e., a company that wants to run its apps in a cloud environment and needs to figure out ROI), as well as for Platform-as-a-Service vendors who are leveraging EC2 under the hood.UPDATE: Amazon has updated their reserved instance pricing as of August 2009. Please see my revised numbers and spreadsheets here: Amazon Reserved Instances Update.