In this video , Foursquare says the biggest problem they're facing with EC2 is consistency in I/O performance. They say that the instance storage simply isn't fast enough for them, and while EBS is fast enough when RAIDed, it isn't consistent since it isn't local (EBS is traffic goes over the network). Reddit has also complained about EBS, but they've been able to move onto the instance storage.
If you're willing to reserve the instance for 3 years, the average monthly cost becomes only $656. That's quite a good deal.
Foursquare says in that video they're planning to migrate off of EC2, in part due to I/O performance. I'll be interested to hear whether or not this instance type changes their minds.
The only problem with reserving that instance for 3 years is that better hardware always comes along, especially with the cost of SSDs coming down significantly every year. Usually if you're in the big-data space, your hardware is likely retired after 24 months (12 months if you're well funded) so locking yourself in for 36 months might be a bad investment.
I had thought that EC2 reservations were upgradeable, but a quick check on the forums shows you're right, they're not. Of course, you can play your own "tiered usage" game, like laptops in IT departments, where the old h1.xlarge becomes cheap enough to use as a second-tier machine and you go reserve the h1.xxlarge for Cassandra.
So it does at least appear that in some cases, they'll let you out of your reservation so that you may sign up for something similar. Or at least they let us do that.
AWS cuts their costs at a relatively reliable rate. We've done the match an found that the 1 year reservations are absolutely worth while, but that the 3 year reservations are not. Granted that was for our specific workload / use case.
Money has a time value, and this stuff is getting cheaper fast.