Amazon Web Services today introduced a new payment option for customers looking to rent its virtual servers. Rather than pay for Elastic Compute Cloud instances on demand, customers can pay an up-front fee to reserve server capacity for later use.Amazon is presenting the new option, called Reserved Instances, as an alternative to buying your own on-premises servers. The up-front fees range from $325 per year for a standard Linux server to $2,600 per year for an "extra large" Linux server, with significant discounts for 3-year commitments. Note that Windows servers aren't offered as Reserved Instances at this point.

From a cost point of view, there are two reasons customers might consider this. The usage fees for Reserved Instances (starting at 3 cents per hour) are lower than for on-demand EC2 instances (starting at 10 cents per hour). And Reserved Instances avoid the data center and operational costs (floor space, electricity, cooling, administration) associated with on-premises systems.

Who should consider Reserved Instances? Amazon says the new model makes sense for companies with predictable workloads. Of course, prospective customers will have to do their own cost analysis, but the rule of thumb is that you can lower EC2 costs by paying up front for processing power that you know you're going to need over time. Nanda Kishore, CTO of ShareThis, said ShareThis lowered its EC2 usage costs by 40% using Reserved Instances.

Amazon CTO Werner Vogels writes on his blog that Reserved Instances can be used for a wide range of enterprise computing tasks, including data mining, CRM, ERP, and media streaming. Vogels also notes that Reserved Instances can be used as a stepping stone from on-premises IT to cloud computing. In essence, the next time you shop for a server, you would be putting it in Amazon's data center rather than your own.

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