Economics of starting a VPS Host
So if this has been covered in other threads, please forgive me - my search-fu did not find them.
I'm a sysadmin with datacenter experience, and a friend of mine and I were thinking about going into the VPS business. The economics of it, though, seem bad, so I'm hoping someone can correct my math or my assumptions.
Please note, all prices below are in USD:
I've got a quote on colocation for a 20 Amp circuit, a 20Mb/s pipe, and a rack for 700/month at a cheap, but good, colo facility (an ISP around here rents out part of their space as colo - no management, but the power and cooling also serve their core network gear, so it's very reliable).
I can get a dual proc 8-core Opteron box with 64GB of RAM and 8TB of storage for about 4300. I can get a NAS that can backup 3 servers for 4400. PDU for the rack is 350, switch for private networking is 200, a Mikrotik router to handle the traffic is 400, and I'd need a box to run the control panel and handle monitoring for the VMhosts (750).
3 servers (2 active, 1 hotspare) - 12900
1 NAS (backup) - 4400
Web/monitoring server - 750
Network gear - 600
PDU - 350
Monthly operating expenses:
Total: ~750 (rounding up for easier math)
Presuming I count one "unit" for sale as 256MB RAM/40GB of disk space/1 IPv4 address, that gives me 256 "units" for sale per server per month. Please note I'm assuming some degree of overprovisioning for storage - I'm guessing most people don't use the full 40 - if anyone has any good numbers on this, I'd love to hear them. I'm also counting a 512MB VM as 2 "units" and going with a consistent price increase.
With 2 servers, I have 512 units to sell. That means I need to sell 375 units to break even on operating expenses, leaving me with 137 units to pay for the hardware. This is not counting whatever advertising dollars I'd have to spend to sell completely out.
At that rate ($274/month), I'd pay off my hardware in 70 months, long past its preferred lifespan. If I increase to 5 servers, and don't buy another NAS, I make $1810/month. I'm still at 17 months before I see profit, really. After that it's diminishing returns - about 13 servers and I pay off in 11 months, but I'd need more infrastructure, not to mention the 70k upfront that would cost.
So what am I missing here? Am I buying overly expensive servers? Should I be overprovisioning them? I was assuming sale to full capacity for proc/RAM, but no overprovisioning there.
Please, lowendtalk, give me your wisdom.