Last week, AWS announced its 26th price drop, which may have you wondering what this trend really means long-term. In the short term, it means that Amazon EC2 customers with Linux or UNIX reserved instances will see their prices decrease by up to 27%. And this is hardly the only AWS price reduction we’ve seen recently. In early February, Amazon dropped its data transfer pricing significantly across nine AWS regions lowering the cost of data transfer between regions from 26% up to 83% depending on location. February also saw AWS reduce the price of deploying a relational database with automated failover from between 15% and 32%. Wow, that’s a lot of cost cutting!

But while these announcements are great by themselves, it’s important to know that price drops aren’t just a market trend. Price reductions over time are part of what makes cloud computing so attractive, and they’re also why cloud TCO is so revolutionary and compelling. Our customers understand that the cloud will bring them a lower overall TCO, but most are happily surprised when it turns out they were only looking at those savings from one perspective. Cloud TCO is so fantastic because it’s multifaceted. You can save money in so many ways.

First and foremost is the basic cost model. Today you’re buying infrastructure in big boxes and paying for everything up front no matter how much you actually use. CPU cycles, storage foot print, even facilities charges, these are all fixed costs in the current model no matter the utilization. But the cloud lets you access those resources by the hour. You’re paying for infrastructure only when you use it, and you can stop paying as soon as you’re done. That’s the cloud’s number 1 differentiator when it comes to infrastructure usage, and from a TCO perspective, that’s huge all by itself.

But it’s even more significant when you consider that the cloud also brings more freedom and agility to your business. With in-house infrastructure, if you need to add extra server capacity, you’re buying X number of new servers, namely however many you need to service peak demand. Period. Then you’re waiting for them to arrive and get installed and configured. Again, period.  That’s pretty much it. But in the cloud, (1) you’re paying for those servers only when you use them, (2) you can use them immediately and from any location, and (3), you’re paying only what the cloud provider needs to charge based on the overall resources at its disposal.

Number 2 means a big uptick in your ability to respond quickly to new needs or opportunities, and that always means more money. Number 3 means pricing based on economies of scale: The bigger a provider’s cloud, the lower your price should be. This is the root of why cloud price decreases aren’t a trend, they’re simply a part of cloud computing. It’s the nature of a cloud to grow and refine its services, and that process will simultaneously bring down customer cost for a couple of reasons.

For one, growth means customers get to take advantage of economies of scale when it comes to purchasing and using IT infrastructure. As clouds go, AWS is a behemoth! During his keynote at the recent Amazon re: Invent 2012 conference, Andrew Jassy, senior VP for AWS, remarked that every day AWS is adding enough new infrastructure to run all of circa 2003 – and Amazon was already a $5 billion company then! That’s massive in terms of economies of scale. Even large companies have trouble competing with that kind of volume; but every AWS customer can leverage that scale immediately and will see it lower their TCO over time.

Size also separates the cloud’s business model from that of traditional IT.  Because of its size, AWS can function in a high-volume, low-margin model, which is something traditional IT infrastructure providers just can’t do. Network hardware, servers, management, datacenter facilities, these things all work in a fixed cost model if you’re buying and running them in-house. Only the cloud lets you harness them on a pay-as-you-go basis and with complete flexibility to use only what you need, when you need it, and from where you need it. The more infrastructure a cloud provider has and the more sophisticated that infrastructure, the less they need to charge their customers to use it.

For AWS customers, you’re paying less as you go all the time. AWS has been consistently dropping its prices as soon as it can afford to do so. That’s how clouds stay competitive. We tell our customers to expect a 12.5% price decrease per year when using AWS and so far, we’ve been right. Track these cost drops back for the last several years across AWS, Azure, Google and other cloud providers, and it’s undeniable that the cost of cloud computing has gone down dramatically over time. For cloud services to be competitive not just against traditional infrastructure but also against each other, increasing infrastructure sophistication and keeping costs at a minimum is the only way to succeed. And AWS is succeeding in a big way.

If you haven’t tried the AWS TCO Calculator yet, it’s available online @

-Jeff Aden, President