Computer industry hopes lie in the clouds
No one can easily define it.
But the next phase of the computer revolution is busy being born out of the ashes of the current economic crisis. The new approach delivers computing power as a service over the Web, like an electric utility, instead of making customers buy computers they manage themselves.
It goes by the hazy term of “cloud computing.”
Forget your tidy distinctions between hardware and software, networking and storage, the Web and the desktop. Most disappear as they merge into the cloud.
Clouds are located in centralized data centers that can house thousands of pizza-sized boxes, networked computers that can each process millions of transactions. They take advantage of the latest software that go by buzzwords like Web 2.0, virtualization and open source.
Always in search of the next big idea, the technology industry has latched onto the cloud as its big new organizing principle, once more normal corporate spending patterns return.
“Compelling economics will ultimately force you to move to clouds,” Erich Clementi, IBM’s general manager of cloud computing, told a Dublin conference last week. IBM is setting up centralized cloud computing centers across the globe.
Six months into a financial crisis that has stifled most corporate initiative, two of the world’s largest technology companies are taking the offensive.
Network gear leader Cisco has jumped into the market for big business computers called servers, while computer maker IBM is in talks to buy Sun Microsystems, another server maker, in its biggest merger deal ever, sources say. The value of the deal could run up to $8 billion.
Both Cisco and IBM aim to capitalize on the emerging shift to cloud computing, in particular by grabbing bigger slices of the data center supply market. They are looking to turn vast farms of server hardware and software into utility services that customers can rent.
The promise of the cloud is to do away with the need of organizations and individuals to maintain their own computer hardware, software, storage and network gear. The cloud metaphor is used to disguise the complexity of bringing all these pieces together. It’s the difference between owning and repairing a car yourself or leasing one with a mechanic to keep it running.
These actions, as they play out in coming years, have hundreds of companies large and small reassessing their strategies ahead of what Wall Street analysts are predicting will be a wave of mergers in the tech world. This consolidation could sweep up not only hardware makers, but software, networking, data storage and semiconductor suppliers as well as Web services.
There is no agreement on how to define the cloud. There are complicated academic definitions and others full of self-serving marketing spin. Computer maker Dell, created an industry uproar by trying to trademark “cloud computing” last year, but has retreated after widespread criticism they were claiming ownership for a generically accepted phrase.
The notion of centralized utility-scale computing dates is decades-old, dating back to the 1960s when corporations rented time slots on mainframes. Web hosting services proliferated during the 1990s. The term “cloud” to describe the inner workings of the Internet-at-large date back to the 1970s.
This is all part of a long shift from hardware-based computing to software and now Web-based computing. Clouds allow unused computing resources to be shared, or “virtualized,” and reused by other customers, improving efficiency. To further cut costs, most rely on inexpensive open-source software.
But unlike these earlier forms of managing dedicated machines on behalf of individual clients, cloud computing takes advantage of virtualization technology to reuse the same computing capacity again and again. Online retailer Amazon.com has dubbed this approach as “elastic” computing capacity and is making inroads with the idea.
The dominant players include not just hardware makers like Cisco and IBM and computer rival Hewlett-Packard. There are big name Internet services or software providers such as Amazon, Google and Microsoft, which deliver a range of pre-packaged software services to both start-ups and established businesses. Hot Web companies like Facebook use cloud computing to deliver thousands of different services to tens of millions of users everyday.
Earlier this month, the Financial Times quoted Microsoft research head Rick Rashid as estimating that 20 percent of all the computer servers in the world are now sold each year to a small number of Internet companies — Microsoft, Google, Yahoo and Amazon were ones he named. Computer industry margins, long in decline, stand to benefit as cloud services are sold as packages rather as boxes. Selling the same capacity repeatedly has benefits.
Growth in computer servers used to run business operations has flattened out from their spending heyday in the 1990s. Computing is undergoing a transformation as entrenched ways of selling hardware and software as separate products are under attack. Customers are fed up running complicated systems without clear payback, especially as they look to slash costs in the downturn.
The industry is now plowing most of their new investments into cloud services rather than separate computer products. Start-up promoter and conference organizer Dealmaker Media says the cloud is one of the categories still getting funding by Silicon Valley venture capitalists. It charts $150 million invested in 25 firms in 2008 and so far in 2009.
Some clouds will be hosted by established systems integrators, Internet or telecom service operators ranging from EDS, now a unit of HP, to Amazon to BT or AT&T. Other clouds will be built to sit in-house by big companies to maintain complete control of how they work. Hybrids are emerging that mix private data centers with public cloud services to provide spare computing capacity only when needed.
Market research firm Gartner Inc estimates that cloud services revenue should top $56 billion this year, growing 21 percent from 2008, despite the credit crunch. It forecasts the market to reach $150 billion in 2013.
Wall Street is eagerly handicapping the takeout potential of dozens of downstream technology companies that will need to seek allies in the land of giants.
Possible targets range from equipment makers Network Appliance, Brocade or Juniper to storage/virtualization company EMC/VMware to consulting services such as Accenture or CapGemini. Holdouts are likely to be forced to make partnerships with Cisco, IBM or HP, to survive.
The cloud concept has emerged as the best hope for a maturing computer industry. The hope is this will create conditions for a yet to be fully imagined wave of new businesses, run from the clouds.
— At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns, Reuters’ customers can click on — — Eric Auchard is a Reuters columnist. The opinions expressed are his own —