Dedicated vs Virtual Servers
In the past virtual servers were the only way to go and still have an affordable solution for multiple web hosting and web application needs. Recently though the higher levels of competition have brought down the prices of dedicated servers down to a reasonable level. Our own starter plan offers a dedicated server for just $39.99.
The Problem with Virtual Servers
The idea of the virtual server seems great but it comes against one major limitation, the hardware! Since you share hardware with others on the same server an overactive user can bring the virtual server cluster to its knees. Imagine having a prospective client look at a web application you have just developed only to have timeout errors because someone else sharing that server is downloading a DVD movie. This may be an extreme case but assuming you have 20 people sharing a dedicated server, if many of those people go active at the same time you will see significant performance slowdowns.
Hard Drive Bottle Neck
In many VM situations you have the "chatty neighbor" scenario. This is when another VM instance or several VM instances on the same server make a lot of IO requests to the hard drive. Since hard drives are fairly limited in throughput in comparison to most other components on the server you get drive "stuttering". This is when more requests come in than can be handled and the drive has to deal with request sin the order that they arrived, causing pausing or even timeouts. The more extreme the requests the longer the waits. This in itself will not crash the server but will result in timeouts to software on the box which could be detrimental.
The Dedicated Server Solution
Although a dedicated server on paper may not match on par what a VM instance may be offering, the components are dedicated to only you. There is no possibility of slowdown from other VM instances and there is no risk of unscrupulous hosting providers over subscribing a server box with VMs. Best of all the reduced complexity of the solution will actually make it more reliable. With prices the way that they are currently it really makes no sense to purchase a VM.