Posts tagged buzzword
Cloud Computing Investing Ideas
Mar 2nd
“Cloud Computing” is a new buzzword (or is it buzzwords?). Everybody is talking about it and most people don’t understand it. I will try to review the current state of cloud computing from an investment perspective and possible future developments in the area.
IT expenses are huge in most companies. At least that’s what any manager (with some exception) will tell you. To reduce those expenses, companies have adopted various business practices: cutting the number of personnel (usually with disastrous consequences later), appointing MBAs as IT department managers, buying software packages instead of in-house development (not a bad idea) and, of course, outsourcing (with the whole spectrum of results, from awful to great). In most cases, IT costs have ignored all heroic efforts of managers and have continued to grow. They continue to grow for two reasons: IT does more work every year and most of the efforts of managers are counterproductive- they actually increase costs instead of cutting them.
Looks like managers see cloud computing as a great new way to cut IT costs. They are both right and wrong. They are right because when implemented properly, cloud computing can cut costs and/or increase productivity. They are wrong because there is no such thing as a free lunch and correct implementation still costs a lot of time, effort, and money.
In the news, especially investment news, there are three different IT developments which are lumped together under name of “cloud computing”. Below is a quick review of them.
Internal Cloud
Also called server farm, this is a new way of organizing computing infrastructure. Companies set up big server farms with thousands of individual servers. Servers belong to the company, although management might be outsourced. The biggest plus of internal clouds is the fact that all data is kept on company’s own hardware. Usual features of such farms include: virtualization, automatic computer management and virtual networking. I am not going to explain all these terms, there are enough explanations on the Web. The first server farms, as far as I know, were used by Web oriented companies, such as Amazon.com (AMZN), Yahoo! (YHOO), Ebay (EBAY) and Google (GOOG).
But for investors, the most interesting companies are those which provide hardware and software solutions for internal clouds. The biggest of them are: Dell (DELL), HP (HPQ), IBM (IBM), Cisco (CSCO), EMC (EMC) in hardware; and in software, Microsoft (MSFT), VmWare (VMW), Oracle (ORCL) (which is also a hardware vendor after buying Sun Microsystems). There are also a lot of smaller players, but judging by the latest earning report from Brocade (BRCD), competition is stiff and prospects are not certain.
External Cloud
If the idea of storing data on somebody else’s hardware doesn’t scare you, the cloud itself can be outsourced. Currently, Amazon, Google, Microsoft, AT&T (T) and a lot of smaller companies provide this kind of service. I think that Amazon and Google have an advantage here, both because they are better at managing relationships and have better hardware/software combinations. Microsoft’s policy of using exclusively the Windows operating system is a drag on performance, while Amazon’s and Google’s reliance on Linux is a plus. AT&T is at a disadvantage here as well, because its problems with customer service are not restricted to the mobile phones area.
The companies provide virtual machines to their customers, with the operating system of the customer’s choice. But Linux is a better base for virtualization than Windows. Unfortunately for investors, external cloud doesn’t look like a significant piece of business for any of these companies or any other big companies which might get into it. Possible candidates are IBM, Ebay, Yahoo!, Dell, HP, Oracle. Of specialized companies, I only found Rackspace Hosting (RAX) and Enomaly, which is not public (yet?). I don’t know if specialized companies have any chance inside of the herd of elephants, but Rackspace is on my watch list.
Software As a Service
I don’t really know why is it often called “cloud computing,” it has nothing in common with the other two. These are suites of applications provided to businesses online, usually through web browser interface. True, companies providing applications might use internal or even external computer clouds, but the business model is completely different.
From my point of view, this is a very interesting development. There is only one problem for the companies here: data is kept on devices which belong to a different company. But in this case, companies don’t need expensive IT departments to run the application. It’s not a big help to big companies, which use hundreds of different applications, including a lot of custom built. But for a small company, which needs less than a dozen applications, this is a very interesting proposition. Current competitors in this area: Salesforce.com (CRM), Oracle ORCL), Rightnow Technologies (RNOW).
Salesforce.com is a leader, and any independent company is a possible acquisition target for Oracle and SAP (SAP). There is a possibility that Microsoft might get into this business, using acquisitions or internal developments, but so far I don’t see any indication.
Of the above mentioned, software as a service is the most interesting investing area. I’m looking at Salesforce.com often, but the stratospheric P/E scares me every time. I might be wrong and the P/E might be justified. For internal clouds, software companies look like the best bet with VMW being the leader. I don’t see any investing possibilities in the external clouds yet. I am long GOOG for different reasons and I think that AMZN is a great company, for other reasons as well.
Related posts
‘Cloud Computing’: What Exactly Is It, Anyway?
Feb 8th
For a lot of small-business owners, “cloud computing” is the latest IT buzzword to leave them scratching their heads. To demystify things, here’s a primer for companies looking to wade into cloud services for the first time.
What are cloud services?
The Journal Report
See the complete Small Business report .
Broadly speaking, any service or program sent over an Internet connection can be considered a cloud service. An outside vendor runs the servers and software, so the buyer doesn’t have to worry about the technical issues in-house—and can focus on its own business.
The services come in a number of forms. Many businesses are already familiar with one aspect of cloud computing: software delivered over the Web. Along with email services like Google Inc.’s Gmail, there are programs that help salespeople keep track of customer information, such as Salesforce.com Inc.’s software, and backup data-storage services from providers such as Amazon.com Inc.
Some businesses don’t just use software services, they buy computing power from vendors such as Verizon Communications Inc.—much like buying power from a utility. Let’s say a retailer expects lots of additional business during the holidays, and its in-house servers can’t handle the load of customer orders. The company might pay a vendor for the use of its servers, to shoulder part of the computing work as the need arises.
Other companies, meanwhile, might buy computing power on a regular basis. They might drop one or more in-house servers entirely—or not buy the hardware in the first place—and let a vendor run their vital programs on its machines. Once again, the buyer would pay a fee based on how much computing power it used.
How much will they cost?
Unlike traditional applications, which require hardware such as servers and IT staff for maintenance, cloud services don’t carry many upfront costs.
A Cloudy Outlook
- About 3.2% of U.S. small businesses, or about 230,000 businesses, use cloud services.
- Another 3.6%, or 260,000, plan to add cloud services in the next 12 months.
- Small-business spending on cloud services will increase by 36.2% in 2010 over a year ago, to $2.4 billion from $1.7 billion.
Source: IDC
Consider software. Salesforce.com’s offering for businesses costs between $5 and $25 per user each month. Google offers a host of programs including email, a word processor, video and a hosted Web site for an annual fee of $50 per user. For small businesses that have more-extensive computing needs, such as drug laboratories with extensive software, cloud services could cost more than $1,000 a month.
As for buying computing power, some providers charge for a certain amount of memory and computing configuration. Terremark Worldwide Inc., for example, charges six cents an hour for one gigabyte of RAM and the equivalent of one processor.
One caveat that might bump up costs a bit: If you’re going to rely on the Internet for your services, you will need a solid connection. While some believe a business-class DSL connection is sufficient, many industry observers and consultants recommend getting a faster line, such as a T1.
Continue Reading at WSJ
