I'll stick with Linode until the company is more established.
To answer your question directly, and without knowing the exact cost structure of our competitors, I would have say that we are generating less margin per unit but we are overall sustainable and growing healthy.
(Google Compute Engine is in the same position because right now they only run on Sandy Bridge.)
My gut tells me that DigitalOcean has at least a couple years until I have to even think about comparing to other hosts again.
On Linode I was getting jammed on I/O; on DigitalOcean I am jammed on CPU.
I'd be happy to give up half my RAM to get twice the cores, actually. I run a modest Wordpress network (http://ozblogistan.com.au). Once MySQL is humming, most of the CPU time is spent on various copies of PHP running the increasingly bloated Wordpress codebase.
(Yes, I've used opcode caching. I've never had good experiences with any of the major ones).
Just wondering, what were your experiences? Installing apc is basically apt-get install php-apc (if you're on Debian/Ubuntu), and that's about it unless you want to increase the memory limit. This will greatly reduce CPU usage.
I periodically try again.
By the way: Starting with PHP 5.5, Zend's own opcode cache will be included by default.
Most vps providers have a rule that you are not alowed to use 100% 24/7/365 or they can cancel your account (I don't know if this is true with DO). The trick is that if you have a lot of customers you can spread the cost on users who are not using full resources (which happens to be most users), at large scale you can make decent profit in this kind of setup, even if your revenue per account is low.
I didn't mention bandwidth because at DC level, BW is the least expensive component, but it is also true that most users will not use up 1TB per month.
Most of it is speculation from my part, and a bit from experience.
I think the whole idea with VPS, is that you can share resources, so there is nothing wrong with that, its the overselling part that should be of concern and I have no reason to believe that DO is overselling. Their performance is pretty good.
The point I was trying to make referring to the OP, that VPS like DO can be profitable even at such a low price, because of the way VPS work. Even with very small revenue, if you have enough customer you can make good money. That's why the math works. Most other KVM offerings are so expensive because they don't have that tipping point scale to make them profitable with the same price. But other hosts like Linode gets away with charging more, because of reputation. They already have a good thing going, unless they starts losing customers drastically, they don't have to change their pricing model.
Yes, most users won't use all the allocated resources. They probably do oversell, but they do deliver the resources if you use them.
But then it looks better if they manage to sell the higher plans. 4cores/8GB/80GB ssd = $80, 2cores/4GB/60GB ssd = $40. These fit easily to single server and that's then $120 per month per server. Compare this to for example some of cheaper dedicated hardware providers like Hetzner [1] who are selling similar dedicated hardware for something like $60-70 per month.
Based on this it could be a sustainable business model, at least if they have enough volume (which seems to be the case, considering the Netcraft article).
(I assumed they are providing dedicated cores and using single socket servers. But it might make more sense to use some relatively cheap multi-cpu servers since with these plans the bottle neck seems to be on the numbers of cores side and not with the memory).
[1] http://www.hetzner.de/en/hosting/produkte_rootserver/ex4
The RAM is guaranteed and the processor is shared. Amazon has been working a fixed-compute model on all except their Micro instances. Other providers are sharing cores.
Right now, DigitalOcean is limiting the number of cores exposed to smaller instances. They may change that in the future (there have been hints on their feedback site that they're looking into changing this so that smaller instances could have better burst capabilities).