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Amazon continues to put pressure on the compute on demand market by once again dropping the price of its EC2 Dedicated Instances this week by as much as 80%.

The Importance of Scale

Because Amazon employs such a huge cache of networked servers, it can afford to consistently drop prices beyond the range of its competitors. In its latest move, it's reduced pricing on its Dedicated Per Region fee from US $10 per hour to US$ 2 per hour in any region where at least one Dedicated Instance is running.

That means Amazon Web Services customers who need to have a single dedicated private cloud can benefit even more from the extreme cost savings Amazon gains from its huge, multi tenant network. The Dedicated Instances are aimed at those who need to have an isolated cloud structure because of government regulations or corporate policy.

For that reason alone, Amazon could by all rights leave its prices right where they were. After all, those businesses don't have much of a choice when it comes to running an isolated instance, and Amazon could simply feed off of that.

Low Margins Drive Amazon

Amazon can afford to cut its prices because it lives in a low margin environment. This is best displayed by the fact its Kindle Fire tablets are produced at a slight loss on the hardware side. That lost revenue is made up for by all the content the company sells through the device itself, and that trend seems to be at work at AWS as well.

In the compute on demand world, having the largest stack wins because the accumulated power of that hardware keeps pushing prices lower. Since Amazon has the biggest computing network, it can afford to cut prices in places where it really doesn't even need to, like with the Dedicated Instances.

The company cut prices on its Dedicated On Demand Instances and Dedicated Reserved Instances as well this week, though not by 80%. Dedicated On Demand Instances prices dropped by nearly 40%, and the Dedicated Reserved Instances went down by almost 60%. All of the price cuts went into effect July 1, and are automatically changed in the AWS charges.