AWS should have shaved down the cost of the dedicated unit as well, if we are in cost cutting mode. Those prices would look very different if they just used some plain jane boxes from 100tb.com or leaseweb.

In order for AWS to make sense, you need to utilize the hourly billing. If you use EC2 and leave you server on 24/7, you are going to be paying more for less powerful hardware than you could with dedicated. Yes, they have a fancy datacenter and instant provisioning and cool backups. You are still paying more. Way more in some cases.

*This does not apply for tiny websites. If your hosting bill is 100$ or less a month, amazon is likely fine for you and maybe the most effective cost saver. Once you go above that mark, Its almost always more effective to be on dedicated unless you are one of the very few people who has truely hourly based service (Think, a seti@home where you only crunch data once a month) - Any normal "website" will do better with dedicated.

Finally, to summarize the above. EC2's main, most important, if-you-arent-using-it-you-are-doing-it-wrong, feature is HOURLY BILLING. If you dont constantly switch on and off from different sizes (and you spend a decent amount of cash) then dedicated is likely better for you.

Dont get me wrong, EC2 is great. But use it for overflow. Or use it for the bells and whistles. Or use it because you have more cash and you would rather not deal with the issues and you like simpledb and yadda yadda yadda. Use it for whatever reason you like. Just dont use it because its cheaper. Because its not.