Business Connection

Image source: Getty Images.

Cloud computing is a big deal, and only getting bigger. The simple idea of moving large computing tasks from smartphones and desktops into bulky data centers via internet links is gathering a ton of steam. Companies like and Microsoft are building billion-dollar businesses in this space.

Lots of service providers tackle the cloud-computing market from highly specialized angles, and several players focus directly on cloud-computing security. Investors are frankly spoiled for choice.

Let's have a closer look at what cloud computing actually is, how the merket is expected to expand, and whether those data-soaked connections can be trusted in the first place.

Cloud computing: A definition

In computing lingo, the cloud is simply another word for the public internet. Drawing diagrams of large-scale computer networks, planners and system administrators often use a fluffy cloud to represent the internet, either outside the corporate networks, or as a link between far-flung systems. It looks something like this:

Cloud Computing

Image source: Getty Images.

The term caught on in the mid-2000s, when Amazon launched the Elastic Compute Cloud (EC2) at the core of its Amazon Web Services (AWS) product. A decade later, AWS and EC2 are still the services to beat in the general cloud-computing market, with Microsoft's Azure Cloud trailing far behind, and a smattering of even-smaller players on the far horizon.

So what do these services do? Glad you asked.

Cloud computing actually comes in many different, but related, flavors.

  • Infrastructure as a service (often shortened to IaaS) refers to running complete systems in a central location (or dispersed across many cloud-connected data centers). Clients can connect to these full Windows, Linux, or Unix installations to run whatever applications and data bases they need. The service provider manages the bare-metal hardware or virtual computing platforms, leaving clients free to focus on the programs they need to run.
  • Platform as a service (PaaS) takes the cloud systems another step further away from the client, offering a managed computing platform where programs and apps can be installed, and then accessed over the internet. Here, it's up to the service provider to take care of the operating system and other support software. Clients use fully baked application programming interfaces (or APIs), and often don't know or care whether the underlying system is running Windows or Linux.
  • Software as a service (SaaS) goes even further. In this model, the service provider already installed and configured the application. Clients connect to (and often pay for) that fully managed installation. It could be a central database, a complete customer relationship platform, an inventory system, or a blogging framework, just to name a few popular examples. Whatever you or your company needs, there's probably a SaaS solution to the problem.

Of course, the borders between these categories often blur into each other. Think of it as a sliding scale, where each service provider usually offers plenty of alternatives between fully IaaS, PaaS, and SaaS solutions. Furthermore, I'm talking about so-called public services here, where a company like Amazon or IBM manages complete solutions on systems and networks under their control. The opposite situation, where cloud-style tools are installed on the client's own hardware, is termed a private cloud. And many clients mix and match these two approaches in a hybrid cloud solution.

This wide assortment of cloud-computing tools may look confusing, or even intimidating. The key here is that cloud computing is extremely flexible.

Amzn Aws Banner

Image source: Amazon.

Real-world examples

Perhaps the most well-known example of cloud computing on a large scale comes from Netflix. The digital-video service runs its computing needs on Amazon's IaaS platform, with no traditional data centers of its own. This arrangement works despite Netflix and Amazon being direct rivals in the video market.

Netflix runs its web sites and general computing tools on Amazon's EC2/AWS platform. The software-driven nature of EC2 lets Netflix provision new servers, or fire up fresh copies of overloaded ones on the fly. The company has developed a large collection of tools to manage its AWS resources, and often publishes these programs under open-source licenses.

The actual video streams are not served by Amazon. Instead, Netflix has designed its own specialized hardware boxes that collect and then publish video content on a massive scale. These are installed as close to the consumer as possible, often in the operating centers of internet service providers, or in vital hubs of online connectivity. If the Amazon relationship shows the power of a strong public cloud-computing service, these so-called Open Connect boxes highlight the private cloud model instead.

Amazon's EC2 instances focus on IaaS -- with a smattering of specialized PaaS and SaaS tools available on the side. Windows Azure and the Google Compute Cloud start at a nearly pure PaaS level with additional SaaS tools.

The cloud-computing concept is here to stay, and there's big money rushing through this market. According to a recent Gartner analysis, nearly every company will run at least some cloud-based services by the year 2020. Not every task will move to the cloud, but hybrid solutions will dominate the IT landscape. And by then, Gartner sees IaaS and PaaS services reaching annual sales of roughly $55 billion.

I'm not here to write the book on every facet of cloud computing, and many books have indeed been written on that topic. I hope that this brief overview will help you understand what cloud computing is all about, and how investors can approach this burgeoning market.

The Motley Fool owns shares of and recommends and Netflix. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.