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Compute instances in cloud services refer specifically to virtual machines that offer scalable computing capacity in the cloud. These instances are built on virtualization technology, enabling multiple operating systems and applications to run on a single physical server by creating isolated environments. This virtualization allows users to easily scale their computational resources up or down as needed, optimizing both performance and costs.

The flexibility of compute instances makes them ideal for a wide range of applications, from hosting websites to running complex computations. They can be quickly provisioned and decommissioned, which is a fundamental advantage of cloud computing. This flexibility and scalability is essential for organizations needing to dynamically adjust their computing resources based on demand.

In contrast, other options describe concepts that are not aligned with the specific definition of compute instances. Physical servers are an underlying infrastructure component but do not encapsulate the virtualization aspect central to compute instances. Applications for data analysis and storage solutions represent different categories of services within cloud computing, but they do not directly relate to providing computing capacity, which is the defining aspect of compute instances.