You make it sound like this is a highly differentiated market. We are talking about hosting hardware. Sure Slicehost (and others) throw some software in to the mix, but the main thing everyone buys is access to hardware (and not specialized hardware at that). So yeah, price does matter. I think it makes them vulnerable to new entrants into the market that can base their prices on today's hardware.

Also, I don't think this is a "small" shadow price increase. Hardware gets cheaper by 50% year-over-year. Even if you cut that in half, a 25% yearly decrease in hardware costs is pretty good for them.