Amazon creates exchange for reserved cloud capacity

Amazon has announced a new program that aims to save you from your own stupidity. Well, maybe not your stupidity, but what about that other sysadmin, the one who makes you roll your eyes from time to time? You know the guy.

When you run a compute cloud, the stupidest thing you – or that other guy – can ever do, from a sunk capital point of view, is turn off a server. When you buy capacity on a compute cloud, the stupidest thing you can do is buy capacity under a long-term reservation contract to get the discounted prices and then not use the capacity.

That's where Amazon's new program comes in. The new EC2 reserved instance marketplace aims to further smooth out the running of Amazon Web Services' compute cloud by letting companies who buy reserved capacity resell it to other buyers. This also means that Amazon gets to drive up the utilization on its cloud while at the same time keeping customers happy.

As you might imagine, the last thing in the world that Amazon wants is a separate market surrounded by other brokers who match buyers to sellers on a second-by-second basis. Amazon, which knows a thing or two about the online retail business, is setting itself up as the one and only broker in the middle of the exchange between buyers and sellers, and it is charging a hefty 12 per cent commission on the seller who wants to get rid of reserved instances.

AWS sells compute capacity in a number of ways on the EC2 cloud. The company started out with on-demand capacity for various virtual server configurations in T-shirt sizes at an hourly rate with no commitment, and this is the most expensive capacity Amazon has to offer.

Then AWS offered reserved instances at the same capacities with a one-year or three-year commitment at a substantial discount­ to the tune of 50 to 70 per cent, not including a setup fee of a few tens to hundreds of dollars per instance if they made a long-term commitment. And for those customers who bought reserved instances in volume (about $250,000 in capacity per year) volume discounts between 10 and 20 per cent are added on top of that.

Amazon also sells unused capacity on the AWS compute cloud one a spot market that it runs, and prices here are really set by supply and demand and vary all over the map, with a floor for the price set somewhere slightly below the on demand instance price.

Naturally, companies want the deepest discounts they can get, but buying reserved instances means doing old-school capacity planning that runs counter to a lot of cloudy thinking.

Your instances are tied to a specific size (and therefore compute capacity), a specific geographical region, and a specific availability zone in the AWS cloud, and over the course of one, two, or three years, conditions change and companies want to alter any one of these factors. Maybe a project finishes early, or they decide to move instances across different regions for performance reasons. Up until now, they have been stuck with the capacity they reserved in exactly the way they reserved it.

With the EC2 reserved instance marketplace, customers can sell their reserved capacity on an open market at a price that they set (Amazon recommends prices, but doesn't set them), meaning that making a capacity planning or cloud architecture mistake will not be so economically punishing.

In effect, the term of a reserved instance will now be set by the market of buyers and sellers, who will buy capacity much like Wall Street buys Treasury bills from the US government at specific terms and rates.

"In short, you get the pricing benefit of Reserved Instances and the flexibility to make changes as your application and your business evolves, grows, or (perish the thought) shrinks," says Jeff Barr, evangelist at the AWS unit, in a blog post.

There are a bunch of rules for buying and selling on the reserved instance market, and it being Amazon's cloud, Jeff Bezos gets to set the rules.

• You have to pay for your reserved instances and have them active for 30 days before you can resell them on the exchange – so if you think you might get rich buying and selling reserved instances, on a one-year contract, that is another 8 per cent you are not going to recoup.
• When you do resell the instances, you can only set the price for the actual compute capacity, not for all of the network, storage, and other services that are used by that instance. These remain at the original levels set by AWS.
• Amazon is also selling reserved instances only in monthly blocks, and rounds to the nearest month with your capacity, not the nearest day. (We imagine that customers will eventually be nagging Amazon to round to the nearest day.)
• Amazon allows customers to sell up to $50,000 of reserved capacity per year; if you need to sell more than that, you have to ask permission.
• Amazon wires the money for the sold reserved capacity to you once the buyer pays, and warns it can take up to two weeks for this transaction to close.

Those are the rules. That other sysadmin is probably too stupid to understand them, so now you have another advantage over him. ®