In some ways, "cloud computing" has become the buzzword of the 21st century. It's a blanket term that can mean a lot of things to a lot of people. In the most basic form, it can mean using data centers with significant processing power to accomplish computing tasks. But it can also include a wide variety of services that are delivered over the Internet.

What is the cloud computing industry?

There are three main delivery methods for cloud computing: Software-as-a-Service (SaaS), Infrastructure-as-a-Service (IaaS), and Platform-as-a-Service (PaaS).

Historically (mostly before the advent of the Internet), software has been deployed locally. Consumers and companies would purchase software licenses for local installation, and software would all run locally. As software vendors released new upgrades over time, customers would need to buy new licenses for the latest versions. That was the extent of recurring revenue that a software company could rely on: upgrades.

Nowadays, companies have shifted toward SaaS. By delivering software applications through the cloud as a service, companies can charge subscription revenue. There are lower upfront costs for customers, but those costs will add up over time as recurring revenue for the software vendor. In order to justify that value, the software can be frequently updated with the newest features more regularly.

Building data center infrastructure is extremely expensive, to the point that it is cost prohibitive for smaller companies in many cases. Many large companies already need to deploy large-scale data centers for their own business needs. However, those large companies may not need all of that capacity and computing power at all times, as their computing needs will naturally fluctuate over time.

As a result, they began to rent out this capacity to smaller companies. This is partially how IaaS businesses started: large companies trying to utilize and monetize idle cloud capacity. Once these companies realized there were incremental revenue opportunities, the IaaS sector was born.

Between SaaS and IaaS lies PaaS. Operating a cloud platform requires numerous backend services, such as application deployment, integration, business process management, and database services, among others.

How big is the cloud computing industry?

When factoring SaaS, IaaS, and PaaS, the global cloud computing market is expected to grow to over $120 billion by 2015. SaaS is the largest portion of the cloud computing market, comprising over 70% of the industry's revenues.

The industry will only continue to grow as more and more businesses and consumers recognize the benefits of shifting computing needs to the cloud. At the same time, companies seeking to offer these services will enter the industry to meet those needs. Cloud computing is a large and growing global industry.

How does the cloud computing industry work?

Most of the value within the cloud computing industry is being created within SaaS. Software adds more value, while also being inherently scalable. As companies shift to subscription models, this creates incredible value for successful SaaS vendors that can enjoy operating leverage and high-margin revenue. It's not surprising that SaaS is the bulk of the industry's revenue.

IaaS is a highly commoditized business, since the types of hosting and storage services offered are most identical among providers. That forces companies to compete primarily on cost. At the same time, the hardware components that build the infrastructure are also highly commoditized, so falling component costs will inevitably be translated into price reductions.

Since cloud computing services are a variable cost for companies, it also provides more flexibility to customers whose needs may change dynamically. This is valuable during fluctuations in broader economic cycles.

What drives the cloud computing industry?

Consumers and companies are increasingly recognizing the value in the various aspects of cloud computing. As the industry matures, it has better addressed concerns over security, stability, and pricing. This will lead to greater adoption throughout the industry.

SaaS can translate into considerable cost savings for companies on the enterprise level, since they no longer have to deal with licensing, management, and large-scale deployments of software. Companies need tools to facilitate productivity and collaboration among employees, and SaaS platforms meet this need in a cost-effective way. Additionally, SaaS can be delivered anywhere, which is especially valuable in a mobile world. Combined, these factors drive the value proposition of SaaS.

PaaS is more complex and isn't as widely adopted. This represents an important growth driver as more companies implement PaaS within their own public, private, or hybrid clouds.

Furthermore, as the world continues to create unprecedented amounts of data, that places more value in data analytics companies. Data analytics companies will turn to the cloud for computing and processing needs, providing another catalyst.

Computing is quickly shifting to the cloud in nearly every way imaginable. It will be a long transition, as cloud computing can only be truly ubiquitous once connectivity is available everywhere. Cellular networks are facilitating this rather well, but there's still a long way to go. This shift will continue for years; cloud computing is here to stay.