Given how cheap the price is, I don't think they have a sustainable business model. As far as I can see, there is nothing technically different from their model that allows their service to benefit from any type of economies (of scale/scope) in order to stay competitive. So then my overall question is - how can they offer better service and better hardware (i.e. more expensive) at a cheaper rate? I'm genuinely curious.
I'll stick with Linode until the company is more established.
Hi, I'm the CEO of DigitalOcean and we are not operating on a fantasy revenue model. All of our unit economics are positive and we are certainly here for the long haul with a sustainable business model.
To answer your question directly, and without knowing the exact cost structure of our competitors, I would have say that we are generating less margin per unit but we are overall sustainable and growing healthy.
Modern machines is my guess. Many other cloud providers and hosting companies are running machines from a few years ago. I don't believe the price has stayed competitive to the power, so DO is effectively arbitraging the price difference between 2010 machines and 2013 machines. That and their API makes it really easy to spin up more machines than you need, leading to some dead weight that doesn't harm your neighbors.
DigitalOcean is my fourth host in four years. I just spent two years with a company inexplicably named Reliable Hosting Services before I switched. Switching hosting providers is surprisingly easy, since I just replicate out my DBs and then eventually switch the primaries over to the new host.
My gut tells me that DigitalOcean has at least a couple years until I have to even think about comparing to other hosts again.
They offer the same amount of RAM for less than Linode, but they offer fewer cores, which makes me suspect they're putting more VPS's on a single host. I haven't yet run any benchmarks, but I think Linode gives you more CPU and Digital Ocean gives you more memory. It's a little more complicated than "better service and better hardware at a cheaper rate."
To add a little bit of anecdata, I recently move from Linode to DigitalOcean.
On Linode I was getting jammed on I/O; on DigitalOcean I am jammed on CPU.
I'd be happy to give up half my RAM to get twice the cores, actually. I run a modest Wordpress network (http://ozblogistan.com.au). Once MySQL is humming, most of the CPU time is spent on various copies of PHP running the increasingly bloated Wordpress codebase.
(Yes, I've used opcode caching. I've never had good experiences with any of the major ones).
>(Yes, I've used opcode caching. I've never had good experiences with any of the major ones).
Just wondering, what were your experiences? Installing apc is basically apt-get install php-apc (if you're on Debian/Ubuntu), and that's about it unless you want to increase the memory limit. This will greatly reduce CPU usage.
I think the trick is (as it is with most vps providers), that most users, don't always use full memory and or full CPU usage, or even disk space. The full usage, if it ever happens usually happens in small bursts.
Most vps providers have a rule that you are not alowed to use 100% 24/7/365 or they can cancel your account (I don't know if this is true with DO). The trick is that if you have a lot of customers you can spread the cost on users who are not using full resources (which happens to be most users), at large scale you can make decent profit in this kind of setup, even if your revenue per account is low.
I didn't mention bandwidth because at DC level, BW is the least expensive component, but it is also true that most users will not use up 1TB per month.
Most of it is speculation from my part, and a bit from experience.
I don't think "overselling" is the right word in this, it implies degradation of performance because of too many VMs. My understanding, is that all VMs allow sharing resources, even KVM. But to my understanding, you can share memory on KVM, but not diskspace (at least not easily), which is why every single KVM offers out there have very small disk allocation. This works great for DO, because they are offering SSD, and SSD VPS (regardless the type of VM) are small in size, so it fits perfectly.
I think the whole idea with VPS, is that you can share resources, so there is nothing wrong with that, its the overselling part that should be of concern and I have no reason to believe that DO is overselling. Their performance is pretty good.
The point I was trying to make referring to the OP, that VPS like DO can be profitable even at such a low price, because of the way VPS work. Even with very small revenue, if you have enough customer you can make good money. That's why the math works. Most other KVM offerings are so expensive because they don't have that tipping point scale to make them profitable with the same price. But other hosts like Linode gets away with charging more, because of reputation. They already have a good thing going, unless they starts losing customers drastically, they don't have to change their pricing model.
1 core/512MB/20GB ssd => $5. They state that they are running hexcore hardware. That translates to 6*$5 = $30 per month per server. So that's probably not making much money for them.
But then it looks better if they manage to sell the higher plans. 4cores/8GB/80GB ssd = $80, 2cores/4GB/60GB ssd = $40. These fit easily to single server and that's then $120 per month per server. Compare this to for example some of cheaper dedicated hardware providers like Hetzner [1] who are selling similar dedicated hardware for something like $60-70 per month.
Based on this it could be a sustainable business model, at least if they have enough volume (which seems to be the case, considering the Netcraft article).
(I assumed they are providing dedicated cores and using single socket servers. But it might make more sense to use some relatively cheap multi-cpu servers since with these plans the bottle neck seems to be on the numbers of cores side and not with the memory).
It isn't a dedicated core. Linode offers a $20/mo 8-core instance. That doesn't mean there aren't others sharing those cores. If Linode were offering 8-core Sandy Bridge E5-2670 servers with all 8 of those cores dedicated to you for $20, that would be quite a steal.
The RAM is guaranteed and the processor is shared. Amazon has been working a fixed-compute model on all except their Micro instances. Other providers are sharing cores.
Right now, DigitalOcean is limiting the number of cores exposed to smaller instances. They may change that in the future (there have been hints on their feedback site that they're looking into changing this so that smaller instances could have better burst capabilities).
I'll stick with Linode until the company is more established.