Don't get me wrong - the idea is great and it's great for really low end workloads where the gotchas don't matter or really big systems where you'd be managing against most of those issues anyway.
But in the middle of the two there is a dead space that I bet a lot of shops are stuck in - double digit instance numbers running a workload that a 2-4 servers could handle with plenty of leg room.
If you're deciding on a cloud provider in 2012 I think it makes a lot of sense to shop around. There are lots of people doing the on demand api deployment thing now with different trade offs. I like joyent a lot (local reliable io) or providers with cloud and a colo area even if it's exorbitant - as paying five hundred dollars a month for instnaces one ssd could replace sucks.