Cloud Computing: What Is It, Which Companies Will It Affect?

First, what is cloud computing?

For starters, it is a disruptive technology, defined as one that changes the industry quickly and dramatically.  In the case of cloud computing, users no longer need to purchase and license software from a software company like Microsoft or Oracle. Users merely "rent software" located somewhere on the Internet "in the clouds."

Let’s use an example to understand cloud computing.  You can book an airplane reservation with one of the airlines by telephoning them using a toll free (800) number.  You will be connected to a reservation person who takes your information (departure/arrival time, destination city, fare) and books you on the flight of your choice.  What really happened?  You used the reservation agent to enter your travel information into the airline’s software.  When you book a reservation online using your personal computer, you are replacing the agent with yourself and booking your reservation directly on the airline’s software.  You don't know the location of the computer.  If you are traveling on a major airline, computer centers will be located in several cities all over the world.  You have no idea where these computer centers are and you don’t care.  They are somewhere out there, somewhere in “the clouds.”  This is an example of cloud computing.

You, as a user, do not install the airline’s software program in your personal computer, nor must you buy software from the airline company.  You simply use it for a short period of time to accomplish your task.

In the case of an application program similar to Microsoft’s word processing package, you use the software on a computer located somewhere on the web "in the cloud," accessed by the internet.  When you are finished, your data is kept on a storage unit also somewhere "in the cloud."  You will be charged a fee for using the computer time and the selected software application.  The software applications that are available for use in this way are known as Software as a Service (SaaS).  You do not know where they are on the World Wide Web nor do you care.

What are the advantages to this concept?

Since you don’t own the software, you do not have to maintain it or fix it when it fails. You never have to download updates or the latest version.  The company offering the use of the software application performs all of the maintenance, repairs and updates.  And unknown to you, they will replace the existing version with the latest, newer version of the application.  This is less costly for you than purchasing and maintaining software in the traditional way.

Many companies offer either computer or storage time in the cloud.  IBM was probably the first.  Amazon.com offers both.  Google, Microsoft, Yahoo, and IBM have tens of thousands of data centers that sell cloud computing for business and consumer use.

Start up companies such as Sales Force.com offer Customer Relationship Management (CRM) software as does Google Apps with its word processing, spreadsheet, and presentation software packages.  Other start-up software companies offer a sizable array of software packages as a service, all resident in the cloud.

What will be the effect of cloud computing?

Since cloud computing offers less expensive software to businesses and consumers, traditional software companies will see declining product revenues and profits with the usual decline in stock price.  This will affect companies such as Microsoft, Oracle and SAP but also any company that sells packaged software as a product to be licensed and installed into a user’s computer.  These companies will all be forced to adapt their business model to this disruptive technology.

Larry Ellison, CEO of Oracle, the second largest software company after Microsoft, thinks that cloud computing will be a bust.  He will change his mind when his revenues drop off quarter after quarter.  Microsoft realizes the threat, but in typical Microsoft fashion is reacting slowly to the effect cloud computing will have on their business.  Both Apple and Hewlett-Packard must confront cloud computing.  Yeah, I know Apple sells gobs of iPhones and iPods, but a big chunk of their profits come from selling Mac computers, requiring software to be loaded in the user’s computer.

So investors, keep your eye on software and computer companies, particularly what initiatives they are implementing to participate in the growing cloud computing market.

The technology industry is constantly innovating new ideas and, as investors, we must move with it.

Copyright by Bill Durrenberger October 3, 2008. All rights reserved.

Disclaimer: The statements and information presented in this article reflect the opinions of the author and do not constitute a recommendation to buy or sell specific securities.  Before purchase of any investment, the buyer should consult a financial adviser.

Comments

[Jim Haprian]

Good article Bill. More adn more things are headed towards SAAS and Cloud computing. Do you think Microsoft has missed the boat even though they're now offering Office as a SAAS?

[Bill]

SAAS seems to be the future. As a private consumer, it sound like this is the way to go. I soppose if you are a company or user that spends great chunks of time using these packages, it might not make sense. How do companies like Microsoft not see this comong and react faster?

Thanks for the article!
WKD