A Surprise Cloud-Computing Powerhouse

These days, it seems you can't even turn around without bumping into the term "cloud computing."

In fact, last week, while traveling around the Bay Area on our Motley Fool Innovation Tour, the only two phrases that got more play were "Silicon Valley" and "venture capitalist."

So when we sat down with one of Silicon Valley's most famous venture capitalists at his Menlo Park office, it came as no surprise that he had plenty to say about cloud computing.

Actually, what he said surprised us ...
But before I get into that, I want to make sure we're all on the same page. After all, "cloud computing" may be the most misunderstood investing buzzword since "biotech."

Some mistakenly assume the term refers to the rise of Wi-Fi "clouds" that allow users to access wireless Internet anywhere within a large radius.

Thanks in large part to companies like Meraki -- whose CEO and co-founder we had the pleasure of meeting with on our tour -- these low-cost, high-speed Wi-Fi "clouds" are popping up everywhere from sprawling metropolises in California to remote fishing villages in Chile.

However, these long-range Wi-Fi networks actually fall outside the scope of "cloud computing" -- as does the highly anticipated nationwide WiMAX network being rolled out by Sprint Nextel (NYSE: S  ) and Clearwire (Nasdaq: CLWR  ) with the backing of Google (Nasdaq: GOOG  ) , Intel (Nasdaq: INTC  ) , and Comcast (Nasdaq: CMCSA  ) .

So, what the heck is "cloud computing"?
Even after reading a 14-page special report in this week's Economist, I still have a hard time coming up with a concise definition. Perhaps the easiest way to understand the basic concept is to think back about 15 years ...

If you wanted to type a letter, create a spreadsheet, or play a game, you'd have to go to the store, buy the software, and install it on your hard drive. And each time you used one of these applications, everything you did took place inside the computer sitting on your desk.

But then the Internet came along.

Oh, brave new world
Nowadays, if you want to watch a video on YouTube, share photos with friends on Flickr, listen to music on MySpace, or post an ad on Craigslist, all you really need is a browser and an Internet connection.

That's because nearly all of the applications we use and all the data we access is now stored on a remote server somewhere out in "cyberspace." And these servers are housed in massive data centers that are all interconnected via the Internet to form a giant computing grid or "cloud."

According to The Economist, 69% of Americans now use some kind of "cloud service," be it Web-based email, online data storage, or online applications such as Google Docs.

Furthermore, businesses are using cloud computing to drastically cut their IT budgets -- hence the explosive growth of enterprise software-as-a-service (SaaS) companies such as (NYSE: CRM  ) and NetSuite.

Time to invest?
Many people see cloud computing as the biggest opportunity in the technology sector since the dot-com boom.

While it's true that our Motley Fool Rule Breakers team is always searching for the next breakout growth story, it's also true that we're skeptical of anything widely being touted as the "next big thing."

That's precisely why we traveled 2,840 miles to meet with top management at some of today's most innovative companies. Along the way, we also had the chance to meet with Silicon Valley legends such as Guy Kawasaki, Dilbert creator Scott Adams, and the renowned venture capitalist I mentioned earlier ...

This guy's larger than life -- literally
At 6'9", Benchmark Capital's Bill Gurley -- a former Florida Gators basketball player -- is undoubtedly Silicon Valley's tallest venture capitalist.

He's also one of the friendliest and most successful. So we felt comfortable playing a game of "buy, sell, hold" with him, and, of course, we started with cloud computing.

We weren't all that surprised when he answered "buy", but we were a little surprised by which company he was actually buying. We assumed it would be one of the companies we met with on our tour, like Google or maybe even VMWare (NYSE: VMW  ) , but we were wrong.

Putting his money where his mouth is
Gurley told us that he'd just snapped up shares of at roughly one times enterprise value -- in effect, giving him a slice of the cloud-computing pie for free.

Among his reasons for liking Amazon over Google in the cloud-computing space:

  • CEO and founder Jeff Bezos' strategy of being a "low cost operator"
  • Amazon's highly developed cloud computing infrastructure
  • Superior customer service
  • While developers figure out how to best use Google's App Engine, he sees money-making businesses being built on Amazon's Web infrastructure

While our Rule Breakers team still prefers Google to Amazon when it comes to cloud computing, we were extremely intrigued by Gurley's analysis and insights. Moreover, we were glad to hear that, just like us, he still believes in the long-term potential of great businesses and is a net buyer of stocks.

Ready to get the full story?
If you'd like to hear more about what this larger-than-life venture capitalist told us --including other sectors of the tech market he's bullish on, companies he likes, and what he sees in store for Silicon Valley -- we'd be happy to send you our Motley Fool Innovation Tour dispatches absolutely free.

In addition to our notes from this meeting, you'll get full write-ups from all of the companies we met with, including Google, Intel, Linden Lab, Immersion, and VMWare.

Again, these dispatches are completely free, and there is no obligation to subscribe to anything. All you have to do is click here and tell us where to send them.

Austin Edwards owns shares of Clearwire and Google. Amazon is a Motley Fool Stock Advisor recommendation. Google, Immersion, and VMWare are Motley Fool Rule Breakers selections. Sprint Nextel and Intel are Motley Fool Inside Value selections. The Motley Fool's disclosure policy claims it can dunk on Gurley -- but we aren't holding our breath.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 01, 2008, at 12:06 AM, asg749d wrote:

    Nicholas Carr also details in his book The Big Switch why Amazon is the company to watch when it comes to cloud computing.

  • Report this Comment On November 01, 2008, at 11:30 AM, enovikoff wrote:

    James Staten of Forrester Research doesn't need 14 pages to define cloud computing as "A pool of highly scalable, abstracted infrastructure, capable of hosting end-customer applications, that is billed by consumption." However, this leaves out describing the two major types of cloud computing vendors: those who deliver applications, such as Google or, and those who deliver computing power alone, such as Amazon, ENKI, or Terremark (and many more.) It also leaves out the distinction as to the target markets: Amazon's self-service price-based offerings are aimed primarily at programmers and technical decsion-makers, whereas ENKI, Terremark, and other future players are looking to provide value to the enterprise by offering cloud computing at higher performance and service levels, and with other add-ons such as managed operations services that allow customers to outsource not just their computers but also the staff that manage them.

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