When network engineers draw up a new service, the big bad Internet shows up as a nebulous cloud on their drawings. The information superhighway is also known as the "cloud" in techie lingo. And so it is that software and services hosted somewhere out there, beyond the data center, have picked up the darling term "cloud computing."
The cloud is definitely a hot ticket right now, with everybody from IBM (NYSE: IBM ) to Amazon.com (Nasdaq: AMZN ) jumping aboard the bandwagon. So what does this fluffy concept mean to investors?
Big brother Cloud
For starters, there are a few different flavors of cloud computing. Some providers, including Amazon and Rackspace Hosting (NYSE: RAX ) , will let you rent computing resources by the hour and pay as you go, in the form of one virtual machine at a time. This way, you get to use something that behaves much like one of your own servers -- but it's a virtual machine sitting in the service provider's IT infrastructure rather than yours.
This platform lets the customer's tech department focus on building and running applications, as the responsibility for keeping the (virtual!) hardware running falls to somebody else. These cloud providers tend to have massive hardware resources and network bandwidth – for example, telecom giant Verizon (NYSE: VZ ) also offers this kind of service -- and it just makes sense for them to rent out some excess capacity to smaller businesses who don't want the system administration hassle.
Little brother Cloud
Whether you know it or not, you've probably been using cloud computing products for years. Every time you hit up Google (Nasdaq: GOOG ) for a search result, or check your Gmail account, or do anything worthwhile on the Web, well, you depend on results from an anonymous server out there in the cloud. This is a primitive form of what's known as "software as a service" (SaaS) or a "service-oriented architecture" (SOA), but those are really just different names for a smaller form of cloud computing.
Rule Breakers recommendation salesforce.com (NYSE: CRM ) goes a step further into the cloud. The company makes a living from managing other companies' sales tools. When you can get to your sales data from anywhere on the Internet, you free up those salespeople to move freely around client offices to land a sale. All they need is a mobile browser, and there's no shortage of those nowadays, and then they can check prices, update inventories, and file new contracts at the flick of a stylus. The cloud computing model makes tons of sense for a service provider like salesforce.com.
How the cloud changes businesses
Cloud computing has created new low-capital business models like salesforce.com's centralized data management. It has spawned new user expectations; once you get used to the convenience of having every business tool at your fingertips, there's really no going back. The cloud even fuels entire new industries, like the whole-platform hosting we talked about earlier.
There's still a place for corporate data centers, of course. Nearly every enterprise will need some specialized hardware, ultra-high-performance computing, or paranoia-blasting security features that the cloud cannot offer -- yet.
But most of them also have plenty of functions that could be shoved out into the cloud today. Hosting the company's home page springs to mind, or running the kind of SaaS applications you saw salesforce doing earlier. And with super-cool tools like Amazon MapReduce, built on parallel-computing technology invented by Google and refined by Yahoo! (Nasdaq: YHOO ) , you can even run supercomputer jobs in the cloud now.
The investing implications
The business benefits of cloud computing include simpler IT management, less system support staffing, high-speed connectivity, and a computing environment with 24/7 tech support and contract-back service level agreements. You should look at how the companies in your portfolio use the cloud, because it's starting to look irresponsible not to take advantage of these great tools.
As for the service providers, Amazon built an early lead in the platform hosting game. Rackspace offers low prices, and Verizon could logically look for an advantage in faster network pipes -- everybody has a part to play -- but I'd call Amazon the horse to beat right now. Keep up the innovation for a couple more years, and the Elastic Computing Cloud (EC2) hosting could become a reportable Amazon division with meaningful revenue and profits.
Keep your head in the clouds, Fool. That's where the IT industry is heading over the next few years.
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