9 Things You Need to Know About Amazon Web Services (AWS) Total Cost of Ownership (TCO)

Those savings, however, are far from a given. It takes a smart customer to keep TCO to a minimum.

Amazon itself aims to help. For instance, it has a TCO calculator (https://aws.amazon.com/tco-calculator/), and a monthly cost estimator (http://calculator.s3.amazonaws.com/index.html).

The first thing to realize is that Amazon has a number of ways to charge for its services, and what makes sense for you depends on your usage patterns. Some shops have predictable and steady state data demands, some fluctuate up and down, and some spike wildly depending on circumstances.

This white paper goes into deep detail about all these user scenarios (http://media.amazonwebservices.com/AWS_TCO_Web_Applications.pdf).

A shorter presentation, “Optimizing Total Cost of Ownership for AWS” by Marc Johnson, Amazon Web Services and Wayson Vannatta, VP of Technology, InfoSpace, also offers some great advice.

Replace Your Servers: The initial premise is that you indeed will save gobs of money with AWS. For instance, Amazon argues that by moving to AWS, customers on average are able replace 400 servers.

Swap CapEx for Opex: By replacing all these servers, you are getting out from underneath enormous capital expense and swapping in operating expenses which should be more predictable.

Take advantage of economies of scale: Huge cloud providers such as Amazon buy storage, servers and network gear in massive volumes. Not only can it drive harder bargains with the hardware vendors, over time its cloud become far more efficient. That is one reason AWS has cut prices 42 since it launched in 2006.

Reap more rewards over time: Last year Amazon commissioned IDC to write a white paper “The Business Value of Amazon Web Services Accelerates Over Time.” It found that the economic benefits of AWS actually increase the longer one uses it.

Take advantage of price cuts:  While the IDC white paper was released last year, the research was done in 2012. “Since this study was conducted in early 2012, AWS has introduced price reductions nearly 20 times across Amazon EC2 and Amazon S3. IDC estimated what the impact of AWS’s fee restructuring would be on the organizations that participated in the 2012 study and determined that the overall fees would drop by 21% lowering the five year TCO from $909,000 to $846,000,” Amazon said. Meanwhile IDC found that AWS increased productivity by over 50%, and saved $518,990 for each application moved to the cloud.

Examine TCO: If you are going to minimize your total cost of ownership, you first have to understand it. Let’s assume you have an on-premises application you want to move to the cloud. The first step is to examine every aspect of the cost of that application, which includes IT staff, hardware, storage, licensing and maintenance, real estate and power.

Then you can work with Amazon to get an estimate as to how much that app would cost running on AWS.

Choose your pricing plan: There are many ways to pay for AWS, and the choice you make should be based on your style of use. “Amazon Elastic Compute Cloud (Amazon EC2) and Amazon Relational Database Service (Amazon RDS) provide different ways to purchase an instance (virtual server) in the cloud. The On-Demand Instance pricing option lets you purchase an instance by the hour with no long-term commitments—you turn capacity on and off instantly. The Reserved Instance (RI) pricing option lets you make a low, one-time payment for each instance you want to reserve, and in turn, you receive a significant discount on the hourly usage charge for that instance, and are guaranteed capacity. The Spot Instance pricing option (available only for Amazon EC2) allows you to bid for unused compute capacity. Instances are charged at the Spot Price, which fluctuates periodically depending on the supply and demand for Spot Instance capacity. Functionally, Reserved Instances, On-Demand Instances, and Spot Instances are the same,” Amazon explains.

Amazon, however, advises that you base your TCO analysis on Reserved Instance (RI) pricing.

“They will provide the best apples-to-apples TCO comparison between on-premises and cloud infrastructure. Reserved Instances are similar to on-premises servers because in both cases, there is a one-time upfront cost. However, unlike on-premises servers, Reserved Instances can be “purchased” and provisioned within minutes—and you have the flexibility to turn them off when you don’t need them and stop paying the hourly rate,” the company said.

Fine tune your instances: Once you understand your usage patterns for reserved instances, you can then pick the plan that makes most sense. Amazon offers three forms of reserved instances, light, medium or heavy utilization.

Save by using more: With AWS, the more you use, the lower the price. “For storage and data transfer, pricing is tiered. The more you use, the less you pay per gigabyte. For compute, you get volume discounts up to 20% when you reserve more,” the company said.

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