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I have a rackspace hosted server that I'd like to "add" more storage to. Rather then pay for an additional drive to be physically added to my server I'd like to consider leveraging cheaper cloud storage options.

Is it possible to mount a could storage account as a network drive on my server and add virtual directories for my iis sites to point to this drive so my application/iis can interact with the cloud files as if they were stored locally. Ideally I'd like to accomplish this without having to make any changes to my current application.

Is this possible? Is it advisable?

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There is no free lunch. You need a cloud network agent solution to do this. I recall AWS does have something like this : AWS storage gateway. It run on top of virtual gateway appliance in AWS to service the network storage connection.

It is difficult to concluded it is good or bad, because there is little details of what you really try to achieve for your application & IIS service. You should first look into long term cost of storage gateway and you real requirement , post another question with more details.

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