- You can use an EBS backed instance where the EBS volume is the core volume. You can add additional EBS volumes for more disk space
- The only real benefit of instance storage over EBS in my opinion is the cost savings, the persistence of EBS is a major plus.
- Despite the comment above, I've set up Magento stores using multiple EBS volumes arranged in a RAID0 and achieved decent I/O. Be prepared to tune and tweak the server.
- Instance size is going to be dependent on traffic and load. Without knowing either, my guess is that a small isn't going to perform well. I've seen a c1-xlarge hosting both Magento and the DB perform well with 15,000 uniques a day.
- The 64 bit instances have more options for up sizing and downsizing.
Moving on to AWS involves trade-offs. You're going to get better hardware performance from a dedicated physical box, but you'll loose flexibility. Depending on how your payment gateway is setup, you may have PCI compliance issues in the cloud.