The only way AWS is theoretically cheaper (and even then I find the argument a bit of a stretch) is if you factor in "sysadmin costs". The argument goes that setting up and monitoring your own servers (especially if you go colo rather than renting) is more costly in terms of labour than point and clicking it with AWS.

If you strip the labour cost out of the equation, hosting it yourself can be up to an order of magnitude cheaper. Of course stripping the labour cost out is only possible if you can do it yourself :)

In my case, I can (as could maciej of pinboard.in fame).

Edit: also helps if you can find a well priced data centre or two. For me, I'm planning on going with hetzner.de and ovh.net

  >> Of course stripping the labour cost out is only possible 
  >> if you can do it yourself :)

Or assign value to your time.

The value I assign to the time it takes me to setup the hosting myself is a lot less than the cost of running on AWS.

Admittedly, the calculation is made easier by the fact that I'm not building the next Netflix or Heroku, however, neither are 95% of the other start ups out there.

Running your own servers costs more for engineers/devops/sysadmins, but in terms of how much you pay to your provider, hosting your own is FAR cheaper if you have more than 1 or 2 instances. You can get a 10U GigE unmetered colo for $550/month from this place on WHT: http://www.webhostingtalk.com/showthread.php?t=1200231

I'm fairly sure that if you have 10 instances at EC2, you're paying FAR more than $550/month.

The other benefit EC2 gives you is quick/instant deployment of even really high-end hardware if you quickly out-pace your current capacity and need another box ASAP, whereas even if you were doing dedicated servers, it still takes a hour or two for them to put your new box in a rack and get back to you with the IP and such.

I did the math a couple years ago and dedicated hosting with or without colocation was about 10x cheaper. Maybe things have changed, I dunno.