AWS does have some cheap offerings - some micro instances for your first year are free, which is less than "$5/month, good for tinkering", but for the most part they're not interested in folks who have only a couple bottom-end boxes, because that market doesn't have a lot of money in it.
I think much of this thread is a testament to the lower value customers being ignored. Things about how DO is much less complex, simpler and as a result cheaper.
Here's part of a great talk from Christensen describing the same logic but in the Steel industry: http://www.youtube.com/watch?v=B5FxFfymI4g
The problem with the 'logical conclusion' that you're offering is that it works entirely in a vacuum. It assumes that AWS does not innovate itself, but steams on with a stolid product. Nothing could be further from the truth - barely a week goes by without them announcing a new service or improvements to an existing one. DO is behind the 8-ball-that-is-AWS, but AWS isn't just sitting there on the felt, it's moving too.
Given the culture of innovation that exists at AWS, it's not hard to see how they could adjust themselves if DO actually does become a threat. AWS is not head-in-the-sand Microsoft, and even if it were, the might of all other operating systems combined - including that of the company so successful that it has $100 billion just lying around in cash - still hasn't knocked Windows off the top spot. Hardly the 'downfall of the incumbent' suggested.
And Microsoft is still undisputed king in the realm of enterprise user software. Unix has always shared the server room with MS (actually, MS is the interloper there), but outside the server room, enterprise users live on MS. There is a myriad of cheaper enterprise and/or office software out there, and MS isn't particularly threatened by it.
Things about how DO is much less complex, simpler and as a result cheaper.
And then when you need the big stuff... the stuff for which you need to pay the big bucks... the complexity isn't there and you move to the vendor that does supply it. When DO makes those kinds of offerings, then AWS will see them as a serious competitor, and you will see prices drop sharply. Until then, it keeps on truckin'.
When they added cloudfront, RDS or elastic beanstalk they were offering "something less flexible but very simple" even while they were adding glacier or MFA through IAM which are for more "complex" customers.
I think I can see where you're coming from but I strongly disagree that AWS will protect its market share by adding more products.
Each new product doesn't just bring utility in terms of what customers can do - it also brings disutility in other areas. New products dilute marketing (what are you selling?). It dilutes the allocation of internal resources (maintenance, R&D, marketing). It increases cognitive overhead for customers (E.g. the product range is a mess -EC2/S3/SWF/SQS/SES/SNS/FPS How is a customer to keep track of what's going on?).
My assertion is that for the average customer - new AWS products only bring headache and zero benefit. Because most people just won't find the need for it. Also AWS don't need to care. They will not meaningfully improve the core offering to the average user because it's the high end customers that will move the needle at the end of the day.