dedi & VPS hosting primer

Not that it's the first one of its kind but when I saw todays "Best KVM VPS under €3 and €5 per month" thread I decided that it was about time for someone to provide some hosting basics insight.

For a start most people think that the hardware costs are decisive. Well, they are usually not as you will see further down. What really drives the cost of providing dedis and VPSs is (in no particular order)


Lets start with the last one, power. In Europe you'll pay anywhere between about 0.1€ and 0.3€ per kWh (in a DC). Small fries, right? Nope, very wrong. Let me show you:
Assume a server with a typical configuration: dual 100W processor + another 50W for memory and SSDs. An average month has 30.5 days of 24 hrs each, so power costs will be about 0.25 x 30.5 x 24 x 0.3€ (in DE) = about 55€
"But a server doesn't run full speed all the time" I hear you say. Well, yes and no. Yes it doesn't always run full speed. But No because TDP is not the real world max. power drawn by a processor. My second point is that no matter what, power is a major cost factor, in fact it is typically a multiple of the hardware cost.
And yes, that also means that it makes a big difference whether a processor has a 50W vs a, say 120W TDP.
But of course we must also see the number of cores and the performance of the cores. More below.

Bandwidth may look cheap at, say €1.25 per TB - but keep in mind that the end product, say a VPS sells for just a couple of bucks, so even €1/mo is a major cost factor.

Finally IPs, a particularly nasty issue for many because not only do they cost about €1 per month (if you are lucky, e.g. with Hetzner) but those costs are also bound to further rise.

And at this point we have not even looked at hardware, colo, and human resources!

So, what does a provider need in terms of hardware? Well, that largely depends on how he plays the game. He can go cheap and rent a dedi from e.g. Hetzner, say with 8 cores, 32 GB memory, 2 x 240 GB SSD (soft raid) plus an upgrade to a 10 Gb/s port plus 10 TB plus say 35 IPs for about €120 per month (let's not be picky about the exact price) and slice it up into 32 KVM VPS (each getting half a HT). The problem is that that will cost him about 4€ per month so even if he were willing to work for free he'd have to sell at an unattractive price.

"But he could slice it into more pieces!" you say? Well, kind of. If he did that he'd also need more IPs, say 64 and more bandwidth. In other words: no, not really. Where he would save is at the hardware but he'd pay dearly to get more VPS out of that box and end up with a considerably weaker product.

So, let's be realistic. He really has just 2 routes: he either creates a more powerful product by slicing it into 16 "root" servers, each with it's dedicated HT, 2 GB memory, about 15 GB SSD (Raid 1) and tries to sell them for €8+(whatever he and his team need to earn) per "root" VPS. Not really something that'd sell well and easy.
Or he slices it up into 32 KVM VPS with ?? GB SSD? Because "7.5 GB SSD" doesn't sell well, So, let's say he upgrades the SSDs to 480GB but that adds about €25 to his cost, so he would need to sell those 32 VPS with 1GB mem. and 15 GB SSD for min. €4.5 + whatever he and his team need (e.g. to provide support).

Clearly this (renting dedis) is not the smart route to go. So, what's better?

The answer is "scale of operations" or in other words, going bigger, much bigger. You see, there is a reason why the large providers can either sell a lot cheaper or make considerably more profit (or make any profit at all ...). Running larger operations also means larger purchase quantities which again means lower prices. That , in fact, is one of the major reasons why large companies can afford to sell a TB for a bit more than €1 ... and still earn something on it - while a small provider might struggle to get comparable quality bandwidth for 3 times the cost.
Note that other cost factors also go down with size. Example: a full rack costs less than 3 times 1/3 racks which again cost (considerably!) less than 14 time 1HU.

Let me put a counter-point (to the above dedi based VPS example). Let's look at @cociu 's operations.

He has his own DC. His DC almost certainly can't compare to a tier 3 DC but in the low end market that doesn't matter.We saw this just recently with @dedicatserver_ro who uses two Tier 3 (or even 4) DCs. The problem (at least in the low end market) is that people aren't attracted by high value brands and Tier 3 or 4 DCs - they are attracted by price , by bang for the buck.
He was smart enough (like some other providers here) to buy lots of IP4 subnets when they still were less expensive than today. That too is a major advantage, especially with mid to large scale operations.
Electric power in Romania is dirt cheap compared to Germany (where it's particularly expensive). That factor gives him a significant cost advantage compared to his competitors who pay double or even triple the price.
He went in kind of big, anyway for a small team player with maybe 3 people (incl. himself). He didn't start with 3 dedis but with at least half a rack full of servers.
Human resources in Romania are much cheaper than in Germany, UK, NL, or France. As in "maybe a 3rd of the costs in DE,FR, ...".
A factor that was and still is ridiculed by many: he already had a business. Granted perfumes have next to nothing in common with hosting, but having any (not super small) business means that many things are already in place and can be shared. Example: tax advisor, bookkeeping, secretary, administrative tasks, lawyer, etc.. Keep in mind that for an accountant it makes little difference whether he books dedis, perfumes, or office supplies.

Let's look a bit closer and compare his costs (my educated guess) to the costs of a typical small to midsize player.

You can buy

(A) a HP-Bladecenter with 16x BL460c G6 each with 2x Xeon L5640 (6 cores) 2,6GHz (60W) and 48GB mem. (and throw the disks away and put in 32 new 1 TB HDDs, for all together about €4000
(B) a HP-Bladecenter with 16x BL460c G8 each with 2x E5-2660v2 (8 cores, 95W) and 32GB RAM and add 32 new 480 GB SSDs for about €8500
(C) a HP-Bladecenter with 16x BL460c G8 each with 2x E-2630 v3 (8 cores, 85W) and 32GB mem and add 32 1TB SSDs for about €13000

I went with HP Blade Centers because they are often used in hosting and considered relatively cheap when bought 2nd hand. First note the difference between (B) and (C). The big difference? v3 8-core E5-26xx vs v2 and DDR4 memory vs. DDR3. Btw, adding 1TB SSDs instead of 500GB SSDs is not a significant cost factor.

Now, divide those hw costs by 36 (because we assume 3 years lifetime) and then by the number of cores. Result: (A) € 0.6, (B) €0.92, (C) €1.41. That is what your costs per core and month are.
Next add colo and power costs. Colo costs are the same for the three as they are all Blade Centers with 10 HU. Colo costs per hw. core for our 3 variants are ca. €2.80, €2.20, and €2.20. But again, cociu can beat all but the largest players on colo cost. I would be surprised if his costs were 2/3 of the normal costs and I guess they are actually about €1.20 per hw core.

Power costs, when assuming an avg. 2/3 load: (A) €400/133, (B) €565/188, (C) €519/173 with the first number being el. cost at €0.3 per kWh and the second at €0.1.
But what we are really interested in is el. cost per core. In Germany those are about €2, €2.2 and €2.0 while in Romania they are (probably even less than) half of that. Btw, those numbers my also help you to understand why Atoms, Arms, and low power Xeons are so attractive for providers or while some days ago I said that using an 5630L server as basis for cheap VPS is a smart choice. Those cores consume about half the power of normal 85 - 95 W E5-26xx Xeons which means that a VPS can be about €1 per month cheaper.

Maybe now you understand better why a smart player that is also at the right location and chooses his hardware smartly (in our selection it would be (B)) can offer say a 1 dedicated core, 2 GB mem., and 25 GB SSD VPS €2 to €2.50 cheaper than the average player in Germany putting his systems in some providers colo. And that also holds true for normal VPS and even dedis. Side note: Of course really big players with at least a cage or even a room pay less for colo but they still pay more than cociu I guess.

Which leads us to a final point, bandwidth. Let's face it: bandwidth is not as expensive as many providers want us to believe. And I'm not even talking about the ridiculously cheap (and not exactly attractive in terms of quality, but neither as bad as some paint them) 10 Gb/s HE lines. No, let's be reasonable and assume that the cost of a decent 10 Gb/s line is €3600 (which is easy to calculate with), which means a TB costs €1 - and again, that's a decent line. Based on what I know any provider who is large enough, say beyond 40 Gb/s, has costs that are closer to €0.5 per TB (or even less) by using a mix of decent and dirt-cheap bandwidth.

So, there you have it. One can earn real money in hosting - but not as a me-too hoster lacking experience, know-how, financial resources and the readiness to provide good support.

Which leads me to my closing amazement, again with cociu. Why on earth is his support so sh_tty? I mean, you can get decently qualified people in Romania (yes, you can!) for a fraction of the cost of even sh_tty support persons in DE, FR, UK, NL, ... yet his support really sucked. Well noted, I'm not bringing this up to bash cociu, honestly. I bring it up because he has built up something that could become really big . His location isn't perfect but neither is it bad (about 40 ms to DE_FRA, that's much less than what e.g. Americans often experience in their country), electricity is dirt cheap, human resources are cheap, having built his own DC keeps his colo costs way below what others pay, he seems to have a nice fat stash of IPs, short, he operates under excellent conditions. I bet that once his support is halfway decent (not even great, just halfway decent, say less than 6 hrs. response time) he could grow immensely, which again would provide an excellent basis to expand to other countries.

Well, whatever, I hope, my post can help others to better understand how hosting works and what the real costs are. Or in other words: No, you won't get a decent 2 vCores, 2 GB, 20 GB, 2TB VPS for under €3 - but you can and do get decent VPSs for a really good price here at LET.

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