May Your Best Laid Plans Not Go To Waste Any Longer — Selling AWS Reserved Capacity Is A Killer Innovation

From the company that brought shelf space retail thinking and pork belly economics to the world of Internet hosting comes yet another mechanism from another market putting them even further ahead of the competition. Amazon Web Services' new Reserved Instance Marketplace takes the pain of poor guesswork out of cloud capacity planning. The financial side of cloud computing is continuing to get further and further from corporate enterprise IT economics, and this is a change you definitely should embrace.

I hate looking at my AT&T Wireless bill each month, because it tallies up all my unused rollover minutes. Sure, it might be nice to know I have them just in case I decide to have a marathon long-distance conversation, but realistically, it's a reminder that I am overspending on talk time. Even worse is when it reminds me of the expiration date for those minutes. They are basically throwing my inefficiencies in my face. Thanks, AT&T. :(

But at least they are upfront in providing me visibility into this waste. If the overspend were high enough, I could change calling plans and waste less. But why can't I give those unused minutes to a relative or friend who keep going over their allotment? Or sell them to someone willing to pay a lower rate than AT&T's full fare but can't afford the mobile plan I am on?

This is exactly what AWS is doing for cloud buyers. Forrester analyst JP Garbani has long been talking about the gross inaccuracy of capacity planning and has been encouraging clients to use capacity management tools to help rein in these inefficiencies. And Forrester analyst David Bartoletti proved in his June 20th report that the cloud (at least AWS) is nearly always cheaper than other hosting or in-house deployment options when you take advantage of Reserved Instances. But let's face it. Life is unpredictable. Customers are unpredictable, and no, marketing won't give you accurate forecasts for you to plan capacity for all your Systems of Engagement applications in the cloud for the full year. So capacity planning remains a black art. But we no longer need to take the black eye that comes with capacity planning — the wasted overspending.

Now you can correct these errors in planning by selling the overage back to the market. Simply list the Reserved Instances you have purchased (and held as active for at least 30 days) and let the market suck them up. You get back what you paid for them (minus a 12% service fee that AWS takes). The rub? You need to determine that you bought too much early enough for the instances to be valuable to the market. So don't be thinking you can sell them on December 29th when they expire January 1st.

What's most interesting about this move is that it is a business innovation — not a technology innovation — and one that we expect will drive up AWS customer loyalty and differentiation for enterprises. 

Let's face it, we have been overspending on IT for decades. We buy software we don't use fully. We buy more seats than we use because we might need them and we certainly buy more infrastructure and utilize it less than we should. We do it because it's better to have more than you need than less; and frankly, it's more painful to go back through our own financial systems to buy more — quickly. So we accept these inefficiencies. We also accept them because there really hasn't been a better way to buy or an out for our overspending. Well now there is. 

Another big benefit that comes from the Reserved Instance Marketplace is the ability to buy AWS instances at a much lower price than the public rate without having to accept the unpredictability of Spot Instances. And you can avoid the multi-year commitment to get multi-year discounts. Say you know you have a new app launching this quarter and you know it will have a persistent footprint of 30 instances, but you don't know if this application will still be needed after the Christmas holidays. That's a lousy case for buying Reserved Instances. And even if you did, you would only be able to get the 12-month discount at best. Now you can shop for 3-year or 5-year discounted RIs in the marketplace that are due to expire December 31. That's good business planning. 

So far, these types of Infrastructure-as-a-Service business innovations are big differentiators for AWS. I had fully expected other cloud platform competitors to match both Spot Instances and RIs by now, but they haven't. With the Marketplace, AWS is further differentiating themselves from other cloud players and heavily leveraging cloud economics to do so. 

If you are an AWS customer, you owe it to your CFO to take advantage of this right away.

Comments

I agree that this is highly

I agree that this is highly interesting , but it isn't anything new: Strategic Blue have been applying commodities management principles to the cloud world for 2 years+ now. In addition, AWS have perhaps not worked through the implications of offering resale of a product to the extent that they could - see here:
http://gigaom.com/2012/09/18/amazons-attempt-to-commoditize-cloud-resour...
for the view from a former commodities trader.