Virtual Computers, Real Money

At first blush, companies’ demand for cloud computing seems rooted in their desire to save money. Because cloud services can be quickly rented on a pay-as-you-go basis, companies can avoid purchasing extra equipment in anticipation of inevitable, but unpredictable, peaks in demand. For IT executives whose budgets are shrinking during an economic downturn, “that’s a huge ticket to take to their boards,” says William Fellows, an analyst at the 451 Group, which studies enterprise technology. “They’re being told to cut costs and do the same with less.”

But cloud computing isn’t only about cheaper IT; the technology also offers companies the flexibility essential for survival. “The economy has become much more volatile, not just in the past year, but over the past 10 years,” says Erik Brynjolfsson, a professor at MIT’s Sloan School of Management and the director of its Center for Digital Business. “The ability to be agile in your infrastructure is what separates the winners from the losers … cloud computing is one of the most important technologies that affect the ability to maintain that level of flexibility.”

In addition to letting startups bring products to market faster, with fewer developers and minimal initial investment (see “Making Art Pay”), cloud computing has allowed larger organizations to bypass cumbersome internal IT bureaucracies. “BP found out that tens if not hundreds of its developers were using credit cards to buy resources on Amazon Web Services to circumvent their internal processes,” says Fellows.

This suggests that the next big thing in cloud computing will not be an explosion in the number of companies like Amazon and Rackspace, which provide general-purpose, public cloud services, but the conversion of data centers within companies into private clouds. Companies can reap the technology’s benefits by sharing resources among business units more efficiently and responding faster to their needs. Fellows says that his clients who have converted report a 30 percent saving on the cost of infrastructure.

Designing private data centers as clouds makes it easier for businesses to supplement their internal resources by tapping public clouds during crunch periods, a phenomenon known as cloud bursting (see “Conjuring Clouds”). That’s possible because both clouds will have similar protocols.

Mike Evans, vice president of corporate development at Red Hat, says that this is also a way for companies to experiment with the technology: “They’re not just going to turn over their whole IT department to an external cloud in two months. We’re seeing them say, ‘Let me figure it out through an internal cloud.’” Fellows adds, “That’s the next rash of product offerings that we are going to see–anyone who can bottle some of the magic that Amazon and Google have got and make it available internally for enterprises.”

In the longer term, “the real value in cloud computing is not going to be in the under­lying hardware and basic services,” says Sloan’s Brynjolfsson. “They will be relatively close to commodity provisions. It’ll be in the value-adding services that go on top of that.” He predicts a churn of companies offering services. Even if a company comes to control a market, its dominance will be tenuous, because “if somebody else can do it just a little bit better, they can take over the market quite quickly,” he says. “Cloud computing makes it much easier for somebody to do that.”

Fellows agrees that public cloud computing will be dominated by a few big players, but because so many businesses will be running private clouds, he thinks there is the possibility of coöperation between them. He believes that these owners could even compete with the big public players by opening up their private clouds to public use for specialized services–essentially, cloud bursting in reverse. Companies will have opportunities to act as brokers between clouds–providing easy ways to switch loads between providers, for example. There are even companies “setting up now to provide exchanges where cloud capacity can be traded like futures,” he says. But in that case, “these folks are ahead of their time.”