Amazon Reserved Instance Marketplace Provides Escape Route for Pre-Paid IaaS Investments
The Amazon Web Services team has just announced a new way for its cloud customers to sell their unused Amazon EC2 Reserved Instances. This means that customers who made long term AWS commitments in exchange for significantly lower costs can offload their machines before their contract with AWS expires.
Cloud computing is typically equated with a “pay as you go” model where customers are billed for what they’ve consumed. AWS offers this model as On-Demand Instances but also has an option called Reserved Instances where customers can make an upfront payment for a one or three year contract that delivers much lower per-hour instance charges. For example, an extra-large, high memory Windows instance costs $0.57 per hour when provisioned on demand, but that same instance can be as low as $0.07 per hour for a heavily utilization Reserved Instance. However, the risk with Reserved Instances is that a customer who encounters changes in their business situation could be left with a host of idle machines that rack up hourly charges. Amazon CTO Werner Vogels describes how AWS wants to mitigate this risk.
However, sometimes business and architectures change so that you need to change your mix of Reserved Instances. For example, we have heard from a number of customers, that they want the ability to move to a different region, change instance types, or switch from Microsoft to Linux. With the launch of the Reserved Instance Marketplace, you no longer need to worry what to do with Reserved Instances if you no longer need them: You can sell them at a price that you set.
The Reserved Instance Marketplace works by letting customers choose the number of instances they wish to sell and at what price. The AWS team blog explains that some customers may want to do some comparison shopping before purchasing Reserved Instances directly from AWS.
If you have excess capacity, you can list it on the marketplace and sell it to someone who needs additional capacity. If you need additional capacity, you can compare the upfront prices and durations of Reserved Instances on the marketplace to the upfront prices of one and three year Reserved Instances available directly from AWS. The Reserved Instances in the Marketplace are functionally identical to other Reserved Instances and have the then-current hourly rates, they will just have less than a full term and a different upfront price.
The seller only has control over the upfront price that the buyer will pay to get the volume discount on the hourly compute rate. The hourly usage rate itself is not subject to price setting by the seller. However, the seller does have flexibility to choose which pricing model to use for the upfront price. The “linear price drop” option, which is the default choice, decreases the price by an equal amount each month since the value of the Reserved Instance contract is less as fewer months remain. This is reflected in the “suggested price” that AWS shows to the seller. The seller can also choose to define a custom pricing model if they wanted to entice a buyer into purchasing the entire remaining contract at a lower rate than they could get from AWS directly.
AWS takes their own 12% commission based on the upfront price sold to buyer. Sellers will find a few restrictions that exist for this marketplace. Instance configuration details that were specific to the original Reserved Instance contract – such as instance type, region, availability zone and platform – are not subject to change in this transaction between buyer and seller. Also, in order to be sold, a Reserved Instance must have been active for at least 30 days. A given seller can only sell up to $50,000 of Reserved Instances in a given year. However, all these limitations are likely acceptable to a customer that wants to escape from a contract that was based on utilization projections that are no longer accurate. In order to help AWS customers figure out which Reserved Instances they should sell, companies like Newvem offer services that highlight under-used instances that make great candidates for sale on the Reserved Instance Marketplace.
Other cloud infrastructure providers such as Microsoft also offer volume pricing contracts and it remains to be seen these providers follow Amazon’s lead and deliver a combination of long term pricing contracts and customer marketplaces.
Tom Gilb & Kai Gilb Jan 26, 2015