plenty of places rent bare metal machines, and the price doesn't seem quite that world-ending. see packet.net for instance.
and it only gets better if on the bare metal machine you get to turn off all of the performance-draining fixes.
I don't care whether Amazon use virtualisation to get me my 'instance'. They're always careful to stick with 'instance', and never to commit to 'VM'. Wise move, now that they're offering physical ('dedicated') instances [0]. Time will tell whether they take an interest in low-horsepower dedicated instances.
They're probably a bad match for when you have a single batch of work to do, like when the New York Times converted their archives, or every time Netflix has to reencode their video library.
I'm not convinced the cost difference would be a showstopper. More little computers rather than few big computers. Same total horsepower. More motherboards, sure.
Not if they can be made smaller and packed more densely.
> more hardware management overhead
I'm not sure this is a significant issue.
> more and longer wiring
I don't think this follows. They could be clustered. A cluster could be made to look a lot like a conventional big-iron server.
We're talking about replacing a single large machine running, say, 16 VMs (each with an IP), with 16 small machines (each with an IP). Put an Ethernet switch at the last-mile and it's virtually the same, no? Different number of MAC addresses, sure.