I my opinion you choose cloud if you have a high variance of user activity. Need 30 servers at day and 1 at night? Then Cloud is correct for you. Always need 4 servers? Then dedicated servers are probably best. Need servers with great ping and are in Europe and not England? Then use dedicated servers in the country where you are at or most of your customers are. But the best is a mixed setup if you can do that. Rent the number of servers you always need (3 for example) and for spikes start up the cloud with one or two more servers if you really need them for an hour.
I don't think I'd ever buy a physical server and plug it into the wall unless there was a regulatory requirement or I was going to be a cloud hosting provider.
Physical servers are a pain and there are too many options in the cloud to go down that path at this point.
You don't buy a physical server when you buy "dedicated". Dedicated means you rent a bare metal machine, not a virtualized one. It means you don't share it with anybody else.
My strategy: Have a bare minimum of servers (darn things are ridiculously cheap anyway) hosted somewhere reliable near where I live. Any NEW stuff goes into the cloud. So if I decide I need to service European customers I might rent an EC2 VM in Dublin,Ireland from Amazon and test it out. If that does well I may buy physical servers depending on economics. Any burst traffic would also be handled by virtual servers.
If you do the math, CPU in the cloud is just not cheap. Storage in the cloud may seem cheap, but that's only because enterprise storage is so expensive relatively speaking. If you're willing to put some time into it you can get 80-90% of "enterprise" functionality from your cheapo storage as well,thereby beating Amazon's economics.
But cloud is easy to provision and good for folks that don't want to deal with operating systems, networking, security, grumpy middle-aged sysadmins (that'd be me) etc etc.
The OP's question got me thinking about the expense/cost breakdown. I had calculated this earlier but figured I'd share the numbers in case its of any help.
For my project, I bought a new server ~3 years ago which I used for development and hosted from home for my prototypes etc. I paid around 1K for it.
I'm finally ready, so I looked at the cost of Amazon EC2 vs. hosting. Two months ago I also bought a switch(new) and a server off Craigslist: total cost $550.
My provider has a bandwidth cap, like most. Making certain assumptions about the amount of b/w each user is going to consume etc, I believe I can support 3M users/month off my provider for a little more than $200/mo before I am upgraded to the next b/w tier.
For the same amount of CPU/bandwidth etc, making the same assumptions about users I'd pay ~$1K/mo on Amazon EC2. But I'd be able to support around 100K users/mo. Yes I know this is a huge number but its less than 3M.
Which is why I'm not going the cloud route. Plus in the worst case I can sell or donate my servers for a tax write-off.
Most cloud hosting is a scam. It will never compare to the dedicated deals. You should only get cloud if you expect crazy traffic spikes and need to scale quickly. Cloud is easier to manage though, so you might save on the sysadmin costs.
