Amazon's cloud computing division is set to launch an eBay-style auction service that will let users bid on unused virtual server capacity, potentially allowing customers to lower the cost of running applications on Amazon's Elastic Compute Cloud.

Known as "Spot Instances," the price of this cloud-based server capacity changes based upon supply and demand, unlike Amazon's usual fixed prices for server instances.

"With Spot Instances, customers bid on unused Amazon EC2 capacity and run those instances for as long as their bid exceeds the current Spot Price," claimed Amazon. "The maximum price you specify is not necessarily the price that you will pay. For example, if you specify 50 cents as your maximum price and the Spot Price is 30 cents for the period, you will pay only 30 cents. If the Spot Price increases, you will pay the new price (until it exceeds your maximum, at which time your instances will be terminated)."

Amazon, whose EC2 service suffered a power outage taking customer instances offline last week, offers several types of Linux- and Windows-based virtual servers of varying sizes. The fixed pricing scheme, which customers can still access instead of the auction-style pricing, ranges from about 8 cents per hour to $3 per hour.

Since Spot Instances can be terminated without warning, once a customer is outbid, they shouldn't be the only source of capacity allocated to enterprise applications that need 24/7 uptime.

"Spot Instances are well suited for applications that can have flexible start and stop times such as image and video conversion and rendering, data processing, financial modeling and analysis, web crawling and load testing," said Amazon. "By being flexible on when their instances run, coupled with the ability to bid what they're willing to pay for capacity, customers can significantly lower their Amazon EC2 costs. In addition, Spot Instances can provide access to large amounts of additional capacity for applications with urgent needs. When these needs arise, users can specify a higher maximum bid, which will raise the priority of a request for capacity."

Spot Instances come in the same sizes and software types as fixed-price virtual servers. Amazon says it developed the auction-style system in response to customers who said they wanted additional capacity at lower cost, and were willing to be flexible about when they run their applications.

Amazon Spot Instances appears to be "the first step on a large scale towards 'market pricing' for computing based on offer and demand," the company RightScale, which provides services around the Amazon cloud platform, writes in the RightScale blog.

"How it works is simple yet complex," RightScale saids. "The spot price is the per-hour cost of a server and if you launch a spot price server now that's what you pay for the next hour. So instead of $0.10/hr for a small server you might only pay $0.03/hr if that's the current spot price. AWS adjusts the spot price periodically based on the idle capacity available, so the price might be low at night or [weekends] when many sites auto-scale down and it might be high during the day when everything is busy."

Customers must remember that Spot pricing is not intended for all types of workloads.

"It should be clear from the way the spot pricing functions that this is intended for transient compute capacity," the company said. "For your database instances you should carefully stay with the on-demand or reserved instances, but for late night batch jobs where it doesn't matter whether they run a bit earlier or later the spot pricing can save quite some money."