I was rocking with some dedicated servers from SoftLayer (who are awesome) but "downsized" to Linode about 18 months ago. I discovered VPSes weren't as slow or crippled as I imagined and I now serve much the same stuff for a fraction of the cost. Win win.
Linode is awesome and great for small- to mid-range server needs. Even an EC2 small instance is overkill (both in computing resources and in price) for many websites.
However if you do need lots of resources then the cost effectiveness of VPSes - or any virtualized system for that matter - goes down the drain quickly. For high-traffic websites nothing compares to good old dedicated servers. The pricing difference between a dedicated server and EC2/Linode/etc can be as much as 5x for the same resources.
Linode is also a bad choice if you need a lot of disk space, and with "a lot" I mean >100 GB. Expanding disk space on Linode is very expensive, an order of magnitude more than EBS.
How is the pricing difference for a dedicated server and EC2 5 times? Maybe if you only look at the physical hardware cost, but often that is the smaller component. You are comparing a capital asset with both fixed and variable cost components to a fixed-cost per-hour lease of resource.
If you really need to lease resources by the hour then by all means, go with virtualized servers. But for one of the web apps I'm building I know that there's a high chance that I'll need to keep the servers around for at least a year. The prices on e.g. hetzner.de (I'm not a customer, I just read about it on HN) totally blows EC2 Reserved Instances out of the water.
I don't know why you consider dedicated servers capital assets. Maybe if you're colocating your own servers, but I plan on renting dedicated servers that a hosting company provides. They'll be responsible for replacing the hardware if it fails.
Turns out that renting a dedicated server and colocating your own costs approximately the same, assuming that the hardware never fails. If the hardware does fail then renting a dedicated is cheaper.
