This is only the case if you're utilizing all your hardware. A huge advantage of cloud hosting is that you can buy a slice of a machine. I run all my new experimental stuff on $20-per-month Linode instances, and once they get big enough that they need more hardware, they can graduate to whatever. You probably won't need 8 cores and 32GB of RAM and a half TB of RAID-5'd 10k RPM SCSI hard drives for a long time, but you're still paying for it.
At large scale, you're probably better off with a baseline dedicated + cloud for overflow, absolutely.
I forgot this point. Its absolutely correct, you cannot beat the price point for VPS if your stuff can run on a 20$ plan. However, once you get over that hump.. say 100$/month it becomes obvious that dedicated pays off in spades.
At large scale, you're probably better off with a baseline dedicated + cloud for overflow, absolutely.