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The Bright Future for Cloud Computing is Becoming Much Clearer

The cloud computing industry has yet to fully take off, but for an indication of its potential, look at the players getting involved.

Microsoft Corp. (Nasdaq: MSFT), Hewlett-Packard Co. (NYSE: HPQ), Oracle Corp. (Nasdaq: ORCL), Google Inc. (Nasdaq: GOOG), and Inc. (Nasdaq: AMZN) – the biggest names in the tech sector – are all racing to take the lead in this burgeoning industry.

So what's all of the excitement about?

Cloud-computing effectively lets companies outsource information technology (IT) services. The cost of storing data and software, or even billing and payment processes are pushed onto the cloud provider – a separate company that goes through the trouble of securing all of that information.

And the potential of cloud computing goes well beyond storing and transferring data. Recent advances could actually make it possible for two people from different countries who speak two different languages to communicate by phone using software to translate the conversation on each end.

"We're not quite there, but it's coming," Google Inc. Chief Executive Eric Schmidt told a gathering of cell phone industry executives.

Still, the real value of cloud computing is that it lets companies cut in-house IT departments and hardware and software purchases.

Industry analysts separate cloud-computing demand into five categories:

  • Software-as-a-service (SaaS), which licenses an application to customers through a subscription, often in a "pay-as-you-go" model.
  • Platform-as-a-service (PaaS), which lets software developers lease all the resources needed to build their own applications.
  • Infrastructure-as-a-service (IaaS), through which customers lease storage and servers.
  • Communications-as-a-service (CaaS), which is an outsourcing model for business communications including voice over IP, contact center applications, and voice conferencing.
  • And Everything-as-a-Service (EaaS), which involves bundling some or all of the services listed above.

Separating these services allows a broad spectrum of technology companies to choose what information and processes they want to keep in-house and which they'd rather outsource.

"Using IaaS eliminates the capital expenditure needed when deploying infrastructure or large-scale applications in-house. It enables companies to deal with peak demands and avoids over-provisioning [of IT resources]," Marion Howard-Healy, author of the report Competing in the Clouds: Emerging Strategies for Enterprise Data Centres, told technology Web site

Amazon's Elastic Compute Cloud (EC2), a web service that provides resizable computer capacity in a cloud, is an example of IaaS. Google's App Engine and Microsoft Windows Azure, on the other hand, are two examples of PaaS.

"Using PaaS speeds up time to market [for application developers] and eliminates the needs for ISVs (independent software vendors) and enterprises to invest in and manage underlying infrastructure, but it does mean less flexibility and risks vendor lock-in," said Howard-Healy.

The Race for No. 1

Global sales of cloud services will rise 17% this year, to $68.3 billion from $58.6 billion in 2009, according to the research firm Gartner. And sales are poised nearly to double by 2012, to $102.1 billion.

Such high expectations for growth have companies rushing to get in on the ground floor. This was most recently evidenced by the bidding war between H-P and Dell Inc. (Nasdaq: DELL) over 3Par Inc. (NYSE: PAR). HP emerged from the fray with the data storage company for $2.4 billion.

That battle had been brewing for years as both tech giants raced to expand their cloud-computing capabilities.

In July 2007, H-P bought Ospware, a data center automation startup for $1.6 billion, or 16-times that company's 2006 revenue. Earlier this year the computer maker acquired 3Com Corp., a networking-gear maker, for $2.7 billion. And just last week the company acquired ArcSight Inc. (Nasdaq: ARST) for $1.5 billion in cash. ArcSight makes security software that identifies suspicious activity on corporate networks, which will help keep information in H-P's cloud secure.

Meanwhile, Dell acquired EqualLogic Inc. in 2007 for $1.4 billion as the foundation for its data-storage product, and in August agreed to buy storage company Ocarina Networks and server-computer maker Scalent Systems Inc.

In addition to these deals, virtualization software-maker VMware Inc. (NYSE: VMW) announced last month that it would buy Integrien, a provider of network analysis, and TriCipher, a security software developer, for undisclosed amounts. Around the same time, Citrix Systems Inc. (Nasdaq: CTXS) bought VMLogix for its cloud management technology and Red Bend Software Inc. acquired VirtualLogix, which lets mobile devices run multiple operating systems on a virtual machine.

"It's early in the cloud computing market, so companies think if they move now, maybe things will be a little less expensive in some areas, but if they wait, they not only become more expensive, they risk having a competitor buying that offering instead," Paul Burns, a principal at IT analysis firm Neovise, told Fortune.

Burns and Gartner analyst David Smith identified for Fortune three other potential takeover targets. They include:

  • Zuora: Zuora offers online services to manage and automate customer subscriptions and payments. The company was founded by Tien Tzuo, who cut his teeth at – a pioneer in the cloud-computing industry. Zuora's flagship product, Z-Billing, has attracted over 100 customers since its launch in May 2008, according to the company's Web site, and reportedly signed over $1 billion in contracted subscription revenue in the first quarter of its new fiscal year, which ended April 30. Zuora also saw 102% growth in revenue, 127% growth in organic cash flow and was cash flow positive for the quarter.
  • Nimbula: Nimbula is a cloud infrastructure and services system that was founded by the same team that developed Amazon's EC2 public cloud service. The company has raised more than $20 million in funding, according to Fortune.
  • Heroku: Heroku is a PaaS provider that emphasizes ease of use, automation, and reliability for web app developers. It has received more than $33 million in funding, according to Fortune.

Cloudy Skies in Europe

While cloud computing is taking off in the United States, it's found a bit more of a struggle in Europe where privacy laws are more rigid. Personal information also is much more broadly defined in the EU.

Europe is expected to remain a relatively modest user of cloud services, accounting for only $18 billion this year, or about 26% of the global total. By 2012, Gartner estimates, Europe's proportion of global cloud sales will rise to 29%.

"There are restrictions on cloud computing in Europe," Bob Lindsay, privacy director in Europe for Hewlett-Packard, which makes servers and other equipment for cloud data centers, told the New York Times. "This isn't killing the business, but it is slowing its evolution, compared with what is taking place in the United States."

The European Data Privacy Directive, which was drafted in 1995, is the main hurdle to such transfers. The law limits the movement of information beyond the borders of the European Union (EU), hindering cross-border data transfers in a world where technology companies advocate the free flow of information.

The European Commission (EC) allows only the United States, Argentina and Canada to provide cloud-computing services. Israel and Andorra have applied for approval to be designated as computing centers, while India and Malaysia – growing hubs for cloud computing data centers – must negotiate and enter into binding legal agreements with data processors called service level agreements. These agreements are costly and time consuming to prepare, said Lindsay.

The EC began a review of its privacy directive last year, but it is not expected to be completed until mid-2011, The Times reported. Meanwhile, H-P and others are doing what they can to work within the EU rules.

"The benefits and impact of the cloud are so great, and the legislative and technical issues are what they are at the moment," said Siani Pearson, one of H-P's lead researchers on cloud computing technologies. "But we can make sure that the benefits of the cloud come even within the existing framework."

Tony Pizi, head of next generation infrastructure at Deutsche Bank, told Computer World that security and regulation will continue to be concerns but cloud computing is "a game changer."

"Each developer across an organization may have very different access rights. You don't want the developers to be able to check things into testing or development groups without controls," he noted. Still, "I don't think anyone thinks the Internet didn't fundamentally change the world. This is of the same magnitude."

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Join the conversation. Click here to jump to comments…

  1. Brad | September 23, 2010

    A nice summary of where cloud computing is at the moment. Cloud computing is attracting a lot of VC money and the number of services available increases all the time. F

  2. Patti Dock | September 23, 2010

    Great overview on cloud computing market written for the business readers.

  3. Ian Howells | September 23, 2010

    Great overview on the market. The other major segment is "Cloud Storage". The451 in "Cloud Outlook 2010" say it will be larger than IaaS and PaaS by 2013.
    If you analyze searches on Google Amazon S3 (storage) and Amazon EC2 (compute) have almost equal traffic.

  4. Cloud_Zone | September 24, 2010

    'Cloud computing global sales should rise 17% this year to $68.3 billion' Cloud is certainly on the agenda of ever company, the figures speak from themselves. Europe might be starting slow, but they will soon jump on the band wagon. Tech is improving year on year and governments should be increasing investment on IT infrastructure in order to have faster and more reliable connections. It’s invest, or fall behind and risk business going else where….surely they know this?

  5. Hussain | September 24, 2010

    Gartner is lumping everyone into 'cloud'. 3par a cloud service provider? Amazing the hype that is believed.

  6. r. von | September 24, 2010

    any suggestions for investing in cloud computing companies in these early stages?

  7. Bob Larsen | December 5, 2010

    And inhouse I.T. department is usually going to be better. Someone actually comes to your desk. The word 'outsourced' leaves a bad taste in my mouth. There are major problems as far as privacy of data, electricity requirements to run the cloud, and many others. Cloud computing is mostly just all hype. A lot of companies are trying to make a quick buck.

    My company's data stays on MY hard drivers, period. If desktop PC's weren't available anymore, we'd go back to using pen and paper.

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