Well for me personally it makes sense if you are not of very large scale. Real hardware is cheaper but the costs of electric, transit, and colo space are not your only costs. If you are going to do physical hosting right you need to be in several locations, and you need to have a very good idea of what assets you will need for a period of time.

With AWS I can scale up easy, not have to worry about doing things like replacing failed hard disks, and most importantly I can be in multiple geographic sites for no additional cost. That to me right now is worth a 50% premium as the cost for doing that would be higher than that savings.

I think if you reach a certain scale, and have predictable usage, it is not a bad thing to setting up cabinets in 2 or 3 locations. We have found too that a lot of Colos are getting bought up and then will not lease you a few cabinets. They want to sell only to people who want a cage, or entire room. It is hard for small to medium sized businesses.