Drupal in the 'cloud' or in the next room?

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Had a meeting this morning with our IT/System Administrators about our impending Drupal setup. The basic debate was whether to buy a couple of serves to configure here on-site (possibly one in the next building with the other servers and one in some other geographic location) or to host everything in the "cloud." Cloud computing is a relatively recent, Web 2.0-era development involving things like IAAS (infrastructure as a service) and SAAS (software as a service) for running websites, platforms, etc. Google currently offers many SAAS options including such things as Google Docs and Google Sites with more to come I'm sure as they attempt to eliminate the need for operating systems like Windows (Google PC, etc.) So, we're investigating cloud hosting options which in theory sound just dandy though we'll have to see what the pricetag is for these kinds of services. The question: invest in hardware (servers) up front or pay for IAAS that is, presumably, scalable later if traffic and demand dictate ugrading. My initial instinct is migrate to the "cloud" as it is less risky in terms of committment (servers can break down and if they're YOURS, well, they're YOURS) whereas in the cloud, one could just transfer easily (?) to another "cloud" service. Not to mention the abilities cloud services have for distributing load and thus offering higher availability, in principle at least. I wonder if there are any cloud server services that are especially Drupal-friendly?