AWS reserved instances marketplace: The Craigslist of the cloud?

Cloud providers could benefit from emulating Amazon's marketplace for AWS reserved instances, which allows customers to buy and sell idle capacity.

As much as customers love the cloud for its flexible, pay-as-you-go public cloud subscription model, sometimes buying in bulk is the way to go. However, bulk purchasing can sometimes lead to idle cloud capacity.

Amazon Web Services (AWS) already offers AWS reserved instances, a one- or three-year cloud computing term that is purchased for a one-time, below-market fee with deeply discounted hourly charges for the Amazon Elastic Cloud Compute (EC2) instance -- an appealing option for customers that know they will be needing compute power over an extended period.

But cloud capacity planning remains a black art for customers whose business needs rapidly change, as noted by James Staten, vice president and principal analyst for Cambridge, Mass.-based Forrester Research Inc., in a blog post. In an attempt to alleviate the pain of overbuying cloud, AWS recently announced its reserved instance marketplace -- a Craigslist-like forum aimed at offering customers an opportunity to sell their unused instances to other EC2 users.

The Amazon Marketplace allows users who have purchased and held EC2 instances as active for at least 30 days to list and sell back the unused instances for the price they paid, minus a 12% service fee that AWS takes.

While paying up front for compute power may go against the flexible nature of the cloud by locking users into a commitment, the ability to sell reserved instances back to the market puts the agility back into cloud offerings for the customer -- a model that many cloud providers could profit from.

AWS reserved instances: Turning the cloud on its ear

Buying and committing to reserved instances is an almost "anti-cloud" model since many users purchase cloud on demand, without a contract, said Lynda Stadtmueller, program director of cloud computing services for San Antonio-based Frost & Sullivan Inc., noting that the new marketplace may encourage customers to purchase more capacity than they need from AWS with the intention of reselling the excess.

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"It's like scalping in the cloud," Stadtmueller said. "Customers might be willing to make a commitment to the cloud by buying reserved instances for a lower price, but they still don't want to pay for excess capacity and now have the option to sell unused instances."

AWS does have safeguards in place however, to protect the marketplace from becoming an opportunity for cloud brokers and resellers hoping to turn a profit by purchasing reserved instances at discounted rates and selling them at a higher price as the market changes. EC2 customers can only sell reserved instances by month-long blocks, cannot sell at the last minute before the instances run out, and cannot sell over $5,000 in instances per year, noted Laurent Lachel, research director at British technology consultancy Ovum.

"Amazon is not creating a community market -- it's a place where EC2 customers have the benefit of offloading reserved instances they aren't going to be able to use before the end of the term, and customers who need some cloud capacity in a short term," he said.

While AWS reserved instances are not an option for every user because of the length of the terms, cloud instances on the marketplace open the doors for more EC2 users to take advantage of another user's excess capacity.

For users -- like a project manager who may only need a couple months' worth of cloud capacity -- buying reserved instances off the marketplace can be a huge win as the marketplace discounts can be as much as 40% off of the rack rate, Forrester's Staten said.

Can cloud providers follow in Amazon’s footsteps?

While still early in its conception, the marketplace may prove as profitable for Amazon as it is beneficial for customers, Staten said.

"The [AWS Reserved Instance Marketplace] is basically a secondary market for product they already sold," he said, noting the 12% service fee that Amazon charges.

And the marketplace is helping Amazon further differentiate itself in a crowded market. Cloud providers that offer the same services as AWS may have a harder time competing with the flexibility offered by the marketplace, Staten said.

However, other cloud providers can easily replicate the marketplace model, as long as their volume and customer base is similar to Amazon's, Stadtmueller said.

"Cloud providers need to have critical mass and enough sales up front in order to have enough re-sales, or the service will never get off the ground," she said.

While some cloud providers -- like Rackspace or Microsoft Azure -- could easily replicate the AWS marketplace for reserved Instances, it will most likely take a while for most cloud providers to reach a high enough volume to sustain a full marketplace, Staten said.

Let us know what you think about the story; email: Gina Narcisi, News Writer and follow @GeeNarcisi on Twitter.

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