Computer industry hopes lie in the clouds

March 26, 2009

ericauchard1— Eric Auchard is a Reuters columnist. The opinions expressed are his own —

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 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 —


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I work at a company that has tried this “cloud computing” concept. I can attest it is not problem free, in fact at least our first year+ of trying was worse than maintaining our own servers. Every time there is an update of OS or other software, our virtual servers all suffer some kind of outage even though it was advertised that we wouldn’t have this problem. We thus logged more man-hours of maintenance than we did before. I can see other potential problems that other could surmise from the article as well. For example, if providers are selling the same capacity to multiple customers it will only work if there is plenty of capacity to take on everyone demanding peak usage at the same time. If not, customer’s operations will slow to a crawl. Like many things in IT, cloud computing is a bit overhyped for the current stage of imperfection it is in.

Posted by John | Report as abusive

Shades of 1960s dumb terminals and mainframe computers. Same concept, except the ‘mainframe’ is a bank of servers in another country and the link to the ‘dumb’ terminal is open to ‘tapping’ or hacking.

Why to go to the Internet to access my business or confidential data in a box ‘somewhere out there’ ‘ in a cloud’ and dodge ‘bandits’ – hackers – to get to it?

I won’t even hazard to guess how enterprises that have to demonstrate security and integrity of their IT processes could justify storing their data on boxes they have absolutely no control over.

Processor power, software and on storage is relatively cheap… Guess where my stuff is staying? On my box behind my locked door.

Posted by Mike B. | Report as abusive

First I want to congratulate IBM on its takeover of Sun Microsystems and its primary asset – a geekish programming language called Java. Interesting how thousands of layoffs were reported shortly thereafter. My advice – keep the geeks and get rid of the pinheads.

I feel that cloud computing is a logical extension networking schemes intended to process information in a decentralized manner. I don’t like it to the extent that most computer applications are not designed to be adaptive. So if a resource is blocked, there might be no provision for escape or alternative access.

The broader question is, what kind of spark do we need to get us out of this economic situation. This current wave of growth – one that has almost been exhausted – really represents the proliferation of PC technology in homes, institutions and factories since the early 80s. We need something else now. Cloud computing probably isn’t it. But it’s a nice frothy idea that keeps people thinking. That is always useful.

Posted by Don | Report as abusive

it is a flawed concept, like outsourcing. We should quit giving away control of our corporate assets.

Posted by rob | Report as abusive

There is nothing new about “Cloud Computing”. Everytime the concept dies, it seems to be reborn with a different name. Does anyome remember the ASP(Application Service Provider) Model and the SAAS (Software as a Service) Model? It’s totally the same thing as “Cloud Computing”. Every time someone comes with a flasy new name for this concept, there is all sorts of buzz around it as if it were a new idea. I wonder what the next name will be?

Posted by Gordon | Report as abusive

Yes, like the other comments, this is not the first, second, or third time I’ve heard a variation of renting computer services as an industry savior. Back in the early 1990’s, Oracle was pushing the idea of a low cost network computer connected to on-line data services run, obviously, by Oracle. That idea didn’t succeed.

Still, it’s not hard to picture why computer company execs lust after the service utility model. Consider your electric utility: when your grandparents were young, the utility produced 120V, 60 cycle power mostly by burning..err coal. Today that utility produces 120V, 60 cycle power mostly by burning…err coal. Then and now that utility also made 8-10% on investment. No wonder computer execs, tired on hearing yet another grand idea from a geek, what to run a utility.

But then under today’s atmosphere, computers as utilities might be the future. Consider how many people are now moving into “cloud” residences and no longer worrying about hardware maintenance (like roofs) or software maintenance (like mowing the lawn). Of course, much of this move to “cloud” residence has been the result of a strange procedure called…foreclosure. Still, it is a trend.

Posted by JReed | Report as abusive

As several responders have already pointed out, this concept is older than the personal computer.
The big companies keep trying to push it because they have not done well in the P.C. market lately (hello, I.B.M.?).
I’d say it would make more sense to go the other way and do away with many of the servers and move toward a peer-to-peer model of sharing computing resources, ala S.E.T.I. and Bit Torrent.
A secure system for this is all that’s lacking.

Posted by Raymond Howard | Report as abusive

Yeah, thats what I want. To give somebody else access to all my stuff. Are you serious??? If you want cloud computing then you are a drone and will be assimulated. I will never put my data out somewhere where somebody else has access to it. Plus this is not a new concept, hello anybody ever heard of citrix duh!!!!

Posted by Jay | Report as abusive

Cloud Computing… not for me. I have seen the offers. I have dabbled in the software. But, the offered solutions pale to what I currently. I have powerful computers in my workplace. I have software that works. Why would I give this up for cloud-based, “nebulous” solutions. I would have to pay more for bandwidth and trust a third party. NO THANK YOU!

Posted by WebDelvoper | Report as abusive

Yet another re-branding of an idea that is advantageous only the vendor. Personal experience with ASP(Application Service Provider) Model development, Wyse terminals and more demonstrate the following inconclusive list of problems with this “cloud”.
1. SLOW (network)- Far slower than having your own computer/server.
2. SLOW (software)- Extra software required to manage delivery of your applications + SLA (Service Level Agreement) etc.
2. OUTAGES – Frequent with the added ‘bonus’ that you have no control over it.
3. SECURITY – Servers across the world in corrupt countries are not safe. Don’t kid yourself.
4. OWNERSHIP – Whose data is it anyways?
5. FORCES PAYMENT/UPGRADES – Guess What? You’re NOT in control of your own software + data. “Providers” can easily coerce you into extra fees because of your dependency.

Just like any other industry, be wary of “new” ideas. Sometimes they are not in the consumer’s best interest. You’re better off without it. Keep control of our business to yourself.

Posted by Dr. Reality | Report as abusive

So we started with mainframe computing, then time sharing services, then pc’s on a LAN with in-house servers, then hosted servers, now ‘cloud’ computing. Same old thing, brand new name. Its still all about the corporate bean counters thinking they can get something for nothing.

Posted by Andrew | Report as abusive

The problem with Cloud Computing at the moment is exactly the title of the article: it is the hopes of the computer industry, not nessecarily that of other industries. Answering to questions above why one would want to move to the cloud: obviously, the massive elastic scalability is something that is not easy to be replicated in-house.
Another interesting question here is: what can cloud computing contribute to both the bottom line and the growth of a (non-IT) business, and is it able to deliver this better than older but related concepts?

Posted by Jochem Pasman | Report as abusive

There are always 2 sides to the story. Back in 90’s we all saw data centers pop up all over the place hosting portals. Every software vendor had a “Portal Strategy”, and all it was a glorified way to move applications from PC to Web. So why would it surprise anyone to see the same move to a “the cloud”. This might not be the next wave but sure can spark the industry for an uptick.

Posted by PKohli | Report as abusive

Cloud computing is simply wishful thinking when hardware and software companies ran out of ideas and user get sick of putting out lots of bucks for forced upgrades for newer (oftentimes not really demanded) features.

both in personal use, SME’s and corporates are cornered about privacy and security and cloud computing can render very little credibility. Governments, on the other hand, will easily intrude/tap into your data information if they desire to do so.

for costs, with the rapidly accelerating depression of computer (PC or servers)cost (e.g., the net PC for just a few hundred bucks) why should we let Amazon, Google, Microsoft or IBM to control our destiny and pray for the reliability, availability, and serviceability they provide us?

would the banks and insurance companies goo for it? most probably not. Would the larger enterprises go for it, I doubt it. For SME’s definitely they will not be willing to be reliant on a cloud (probably in India)to support their lifeline. I firmly believe at some time in the future, these clouds will be outsourced offshore too.

Posted by Silverback2009 | Report as abusive

There is no such thing as a cloud in computing. It’s a term devised to sell to dim-bulb bean counters and an unfortunately large number of clueless executives. Clouds are sever farms. However, most bean counters would reply, “No thanks. We can do that ourselves,” to a server farm offer. So, the cloud peddlers try to sell a PR fraud called “clouds.” What next, sunshine?

If one plans on retrieving the data, each packet must have a headers so it can be retrieved. If the server system is hacked, a) the data can be traced to owner, analyzed and retrieved or b) the data can be destroyed.

Of course it will be off-shored to the Indians. What a joy. Notice that a Canadian team has recently found that the Indian computer systems were extensively hacked by the Chinese in a 104-nation spy network.

The main rationale for this cloud baloney is the explosion of e-mail storage and a cover my ass with stored computer data mentality. Do the same thing we did in the paper era. On a certain date, everything from the past year is packaged and sent to storage. Period. After three years, it is destroyed. Period. It’s called common sense.

Posted by Jumper | Report as abusive

Clous, ASP, SaaS… In my opinion a main question is still unresolved. Are we really focusing on the users demand ? What components of the ICT portfolio are really requires to produce goods that people can afford and what are not ? When lean, reliable and fast are real requirements to provide people with value the complexity of a cloud or a grid seems to be outdated. There is a terrible distance between the business and the ICT services that is no longer possible to see direct benefits ore efficiencies without making assumptions that are never verified. Perhaps it is time to getting back to a closer view of the business and again a mode direct support from ICT.

Posted by Massimiliano | Report as abusive

please; amazon, google and microsoft send the cloud over our parched Southern Land. the last 232 years(since the British invasion) of intensive agriculture and dark industrialisation has left our land decimated and arid.

the traditional owners(the custodians of the land) have been murdered and displaced to the country that was deemed uninhabitale. we said sorry???

the land was nurtured and revered for over 70 000 years and was in opulence. the native marsupials and magical forests were in a state of grandeur and were fiercely protected by the hunter gatherer nations, of which there were many.

they were a proud people and lived in perpetual respect of their land.

the white man arrived, marines from the British Isles, under the guise of explorers, and welcomed into the land, they thought gods had arrived but little did they know of what was about to happen to THEIR land.

so please send us the computer clouds and cleanse our entire nation with life~giving rain.

let the rainbow serpent live again.

Posted by sweeny’60s | Report as abusive

I might be old, but am I wise?

I think that anyone who puts their private information in the cloud is completely insane and deserves whatever they get.

Private information should be kept in a private place.

Posted by michael | Report as abusive

100 years ago.. many people refused to put their money in banks…now we have only plastic cards !
companies ask question about data security and privacy in cloud environment but they will eventually move to cloud.

Posted by Sunil | Report as abusive

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