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Technology Titans Jockeying For Position In Cloud Computing

Aug 15, 2008 09:00:00 (ET)

SAN FRANCISCO (Dow Jones)--Silicon Valley has its head in the clouds.

In recent months, major technology companies have announced a slew of "cloud computing" projects that aim to deliver software applications, data processing power and storage services over the Internet. Google Inc. (GOOG) Chief Executive Eric Schmidt recently called cloud computing a "truly great breakthrough," while Microsoft Corp. (MSFT) CEO Steve Ballmer declared it to be one of his company's top priorities.

Much like a decade ago, when companies tried to show they had a plan for the Internet, there has been more talk than action so far - making these vague-defined initiatives difficult for investors to handicap. Adding to the confusion is the fact that the term "cloud computing" seems to mean different things to different companies.

"There's a lot of work that still needs to be done," says IDC analyst Jean Bozman. "But (the companies are) definitely moving down the runway."

Behind the growing interest in cloud computing is the belief that companies big and small will be able to dramatically cut their information technology costs by centralizing IT infrastructure. A number of technology sector giants hope to drive this trend - and capitalize on it - by building huge data centers that will provide computing services to customers on a pay-as-you-go subscription basis. Analysts expect many companies will eventually do away with their own systems, turning instead to a handful of cloud providers for their computing needs.

The excitement is understandable. Within the next five years, the market will swell to $160 billion, according to a forecast by Merrill Lynch. The figure includes $95 billion in infrastructure and software, as well as $65 billion in advertising, which cloud providers like Google are expected to use to subsidize their services.

Already, alliances are being formed and new technologies are being developed. Google has partnered with International Business Machines Corp. (IBM), while Hewlett-Packard Corp. (HPQ), Intel Corp. (INTC) and Yahoo Inc. (YHOO) have formed a loose team. These companies are expected to pump billions of dollars a year into cloud computing projects.

What those projects look like remains to be seen. Analysts expect some clouds will be commercially available, while most will be built for major corporations to use internally. Some cloud initiatives may be designed to serve small- and medium-sized companies, while others could target consumers. With a few notable exceptions, service levels and pricing schedules remain undefined at this point. More certain is that a handful of major tech players such as Amazon.com Inc. (AMZN), Google and Microsoft will dominate cloud computing.

"In the longer term, this will be a scale business with relatively few companies operating vast networks," said Nicholas Carr, a former executive editor of the Harvard Business Review, who has written extensively on IT issues and trends.

A few broad approaches are emerging. In one, cloud providers like Amazon let third parties use their raw infrastructure, on which customers can develop their own applications. In the second, companies like Google use their clouds to deliver applications and services to customers. A third approach is for software-as-a-service companies like Salesforce.com (CRM) to provide their products using infrastructure maintained by other companies.

Microsoft and Amazon declined to comment.

James Staten, an analyst at Forrester Research, says the likely winners will be those with data center expertise and an established customer base that they can coax into the cloud. "I expect to see a wide variety of business models," said Staten. "But most are going to get the business model wrong and be gone within three years."

E-commerce giant Amazon is among the cloud pioneers. In late 2006, Amazon built upon its own data center expertise to roll out Amazon Web Services. The service allows small- and medium-sized companies to build their own software applications, such as databases and billing systems, on the same infrastructure Amazon uses to run its own Web site.

Seattle-based Amazon charges clients based on how much computing power they use or how much data they transfer and store. It has proved popular with developers and has already attracted more than 400,000 users, although revenue from its cloud remains a fraction of the company's overall sales. One concern is that Amazon is by far the smallest of the major cloud providers and analysts question whether it will have pockets deep enough to compete against richer rivals, like Google and Microsoft.

Google is expected to invest up to $3 billion this year to augment its enormous network of data centers, already one of the world's biggest. That infrastructure powers Internet services such as Gmail, as well as the company's online office productivity software, and its App Engine, which lets developers use the company's software tools to build their own applications.

Mountain View, Calif.-based Google has not yet detailed how it plans to monetize its cloud. It currently sells advertising to support its consumer cloud services and it is working to sign up corporate customers to subscription services that offer more robust packages of communications, collaboration and security software, Google said. But the company's long-term cloud computing initiatives remain vague and analysts note that it lacks the sales staff to compete with rivals, especially Microsoft, in the enterprise market.

No company has more at stake than Redmond, Wash.-based Microsoft, whose legacy software business is threatened by the shift to cloud computing. It hopes to ease the transition by offering a hybrid approach that combines packaged software with services delivered over the Internet.

While the giant software maker has had little success with its online services to date, analysts note it has a wealth of programming expertise, a huge community of developers and a vast customer base. It also has nearly $24 billion in cash that it can tap to fund its product offerings.

"The future is about having a platform in the cloud and delivering applications across PCs, phones, TVs, and other devices, at work and in the home," Ballmer said in a memo to employees.

Other companies are also jockeying for position though few have outlined specific plans. Two weeks ago, IBM said it would build two data centers to boost its cloud computing infrastructure. In July, Intel, Yahoo and HP said they would team up to create six open-source labs to research cloud computing.

The industry's huge push into the cloud is also expected to drive revenues at hardware companies like Dell Inc. (DELL), virtualization software makers including VMware Inc. (VMW), as well as its parent data storage company EMC Corp. (EMC). All of these companies provide technologies cloud builders need to develop their infrastructure.

Analysts say there are also great opportunities for young companies developing software to make cloud computing more reliable and secure. These include companies like 3Tera Inc., Elastra Corp. and SecureWorks Inc., which are working on products designed to manage, optimize and protect the large number of servers cloud computing requires.

"It's not that easy to get 1,000 servers to load up an application, run it for 15 minutes and then shut it down," said Martin Reynolds, analyst at Gartner. "We need a cloud computing system that runs across 1,000 computers and makes them seem as one."

-By Scott Morrison, Dow Jones Newswires; 415-765-6118; scott.morrison@dowjones.com

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=0%2BM6J14yZkB1AcUymkkuJA%3D%3D. You can use this link on the day this article is published and the following day.

(END) Dow Jones Newswires

August 15, 2008 09:00 ET (13:00 GMT)

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