If you try to construct a standard VPS or dedicated server plan out of EC2, you're always going to find that the bandwidth makes EC2 more expensive -- but that ignores the fact that most people don't even come close to using all their allocated bandwidth. The fact that AWS only charges for actual bandwidth used makes a big difference.

(The same applies with Tarsnap's $0.30/GB storage cost vs. fixed-plan backup pricing -- $10 for 50 GB sounds cheaper, but if people only use 5 GB of that on average, it turns out to be far more expensive.)

Perhaps you don't understand. This is EC2 we're talking about, not prgmr. People run massive production websites on EC2 because it is reliable, predictable, and secure. It provides features that allow you to recover from outages and failures. For instance, being able to periodically snapshot your EBS volume to S3 and recover from a total datacenter failure within a few minutes by reconstituting the volume in a separate datacenter. However, this just scratches the surface on what AWS offers over a traditional VPS provider.