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Summary:

Amazon, with its Spot Instances service announced today, is bringing dynamic pricing to the cloud by allowing customers to bid for compute cycles. The move helps Amazon boost margins by ensuring unused capacity doesn’t sit idle, and may even help it charge more for urgent jobs.

Amazon.com today said it would offer variable pricing for clients of its cloud computing service. The pricing, called Spot Instances, allows users to bid for access to unused compute time for as long as their bid exceeds the current spot price for an hour of computing. The introduction of dynamic pricing is something our guest columnist Joe Weinman predicted this weekend in his post discussing different ways to price services in the cloud. From the Amazon release:

To use Spot Instances, customers place a Spot Instance request, specifying the instance family, size and the region they desire as well as the number of Spot Instances they want to run and the maximum price they’re willing to pay per instance. If a customer’s maximum price exceeds the current Spot Price, the customer’s instances will run until they choose to terminate the instances or their maximum bid falls below the Spot Price (whichever is sooner). Like other Amazon EC2 instances, Spot Instances can be terminated when they are no longer needed. If the Spot Price goes above a user’s maximum bid and the instance is terminated by Amazon EC2, the user will not be charged for any partial hour of usage.

Amazon notes that Spot Instances is good for applications that can have flexible start and stop times such as image and video conversion and rendering, data processing, financial modeling and analysis, web crawling and load testing. The pricing will help Amazon rid itself of unused capacity, much like hotels drop prices or sell certain rooms to discount services in order to ensure that they are as full as possible each night.

As our computers get smarter and our bandwidth becomes faster and more ubiquitous, this type of dynamic pricing will be seen more and more often. In addition to the cloud, mobile operators are eying dynamic pricing models, as are utilities as they implement smart grids. Fixed price may soon become a quaint anachronism, along with newspapers and landlines.

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By Stacey Higginbotham
  1. It’ll be interesting to see how this is applied. Seems most useful for map-reduce processes.

    This should have the effect of smoothing out a lot of their CPU and bandwidth consumption. I don’t know what they’re running into right now, but it must be pretty spikey if they went to the trouble of building a mechanism to smooth it out.

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    1. It was either really spikey and/or the solution to implement Spot Instances was so easy and amzn had enough unused capacity that it didn’t make sense to leave that unused time fallow.

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  2. Amazon EC2, like airlines and hotels, has completely perishable inventory. If no one uses your computing capacity or your hotel room on a given day, you can’t go back and sell it later, unlike widgets. You can make a lot of money filling up that unused capacity. Let’s say Amazon’s at 70% utilization now, and this takes them to 75%, but they only get half the price for that additional usage. That’s still about a 3.5% bump in revenue, pretty much all of which goes straight to profit because you’re not adding any significant infrastructure or operating costs. So I think Amazon’s more interested in the millions of dollars of “free” money they can make out of this rather than smoothing demand for its own sake.

    As for fixed pricing going by the wayside, no way. Didn’t we hear that with EBay and Priceline back in the day? Let’s not recycle a bunch of discredited conventional wisdom. For many (most?) things, people just want a fixed price. Utilities and whatnot are the exception, not the rule.

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  3. [...] cloud infrastructure is being utilized, that could be a good thing for the industry. Amazon in December launched spot pricing for its Elastic Compute Cloud service, and at the time Derrick Harris, a colleague at our GigaOM Pro research service, pointed [...]

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