GO
Loading...

The Business Market Plays Cloud Computing Catch-Up

The big spenders on technology are businesses and government agencies. They buy about 75 percent of the computing goods and services sold worldwide. Yet it is increasingly evident they are not driving the new ideas, excitement and powerhouse technology companies in ascent these days.

“The cutting edge of innovation is on the consumer side — digital technologies for consumption activity, play, entertainment and social-networked communication — and not in corporations anymore,” observed Timothy F. Bresnahan, an economist at Stanford.

Nowhere is that more apparent than in cloud computing, the technology industry’s buzz term for customers’ accessing information held in big data centers remotely over the Internet from anywhere, as if the services were in a cloud.

In the early days of computers, technology advanced because of government-financed research projects and work in corporate laboratories. Hobbyists developed the first personal computers, but it was only when I.B.M. entered the field in 1981, lending its seal of approval, that the PC industry really took off. Selling to businesses paved the way for the leading PC software and chip suppliers, Microsoft and Intel , to become giant corporations.

But marquee companies of the Internet era have made their names and fortunes mainly in the consumer market — both the first-generation Web winners like Amazon and Google , and the second-generation successes like Facebook and Twitter. And they have grown big and grown fast by offering search, shopping and social-networking services in the cloud.

Cloud computing, though, is more than a hyper-efficient means of distributing digital services. The cloud model is animated by a set of Internet technologies for juggling computing workloads in data centers far more efficiently than in the past — potentially reducing costs by about half, analysts say.

Yet to date, the large, established technology companies — and their businesses and government customers — have trailed in cloud computing. The marketing of the cloud, analysts say, is way ahead of real offerings by suppliersand its adoption by business customers.

But there are some recent signs of change. Last week, I.B.M. introduced a range of cloud services, including paying for computing resources like processing and storage on a metered pay-for-use formula, almost as if modeled on an electric utility. I.B.M. will offer customers an à la carte menu, in which they pay for different levels of guaranteed security, support and availability.

I.B.M., a bellwether in the corporate technology market, forecasts that it will have $7 billion in cloud revenue by 2015. Of the total, $4 billion will be customers shifting to cloud delivery from the company’s traditional software and services, and $3 billion is expected to be entirely new business.

“We’re moving to where the puck is going in this industry,” said Steven A. Mills, I.B.M.’s senior vice president for software and hardware. “And we’re more than willing to make this transition.”

In another industry move announced last week, Dell said that it would invest $1 billion over the next two years to build 10 new data centers and expand customer support, largely for cloud offerings.

The largest single customer for computing goods and services, the United States government, endorsed the cloud model this year. Vivek Kundra, the White House chief information officer, wrote a “Federal Cloud Computing Strategy” report, and identified $20 billion, or one quarter of the government’s total spending on information technology, as “a potential target” for migration to the cloud.

That document has certainly caught the attention of the government’s technology suppliers, like Lockheed Martin , the largest. “We’re keenly focused on cloud computing,” said Melvin Greer, a senior fellow at Lockheed Martin.

Still, the outlook is for an evolutionary shift toward the new technology spanning several years, even a decade or more, analysts say. People set the pace of technology adoption, and corporate data centers are filled with people whose skills and livelihoods are based on older technology and ways of doing things.

But technology managers, surveys show, are also genuinely concerned about security, reliability and liability if confidential corporate data resides on another company’s computers — and getting locked into proprietary clouds, controlled by one company. Standards groups are moving to set technical rules for sharing data across different clouds, including a working group established last week by the IEEE, a professional electronic and computer engineering organization.

“Cloud computing will become the new foundation for corporate information technology — it’s inevitable,” said Frank Gens, chief analyst for IDC, a technology research firm. “But there are a lot of concerns, challenges and inertia that will slow things down.”

There are also insurgents, like Amazon, that could speed things up in corporate cloud computing. Five years ago, the online bookseller and retailer decided to start a side business, offering computing resources to businesses from its network of sophisticated data centers. It called the new unit Amazon Web Services. It is a pay-for-use utility model, with customers paying from pennies to millions of dollars a month, says Adam Selipsky, vice president for product management.

Today, the customer ranks include Netflix , NASA, drug companies and major banks, which use Amazon’s data centers to remotely run Web applications that do tasks like tracking customer movie requests or running credit-risk simulations.

The Amazon cloud strategy, Mr. Selipsky says, mirrors its tactics in online retailing: build scale and efficiency, then cut costs and prices to gain market share. Amazon Web Services, he said, has reduced prices a dozen times in the last three years. “Most of that has been in the absence of competition,” Mr. Selipsky said, “because competitors have been so slow to emerge.”

Yet competition in the cloud market is intensifying. And that competition is taking shape across a number of fronts. It includes vendors offering basic computing resources like Amazon and Rackspace , joined by telecommunications giants like AT&T and Verizon that have entered the cloud business; companies offering ready-to-use applications tailored for businesses like Google’s online e-mail, document and collaboration services; Microsoft’s online version of its Office and collaboration tools; and Salesforce.com’s online customer management and collaboration tools.

Several companies also have built development environments on which programmers can build cloud software applications. Google has App Engine, Amazon has BeanStalk, Microsoft has Azure, Salesforce.com has Force.com, and VMware has Cloud Foundry, which was introduced on Tuesday. By 2014, IDC estimates that 30 percent of total spending on software applications in the corporate market will be for cloud applications.

Revenue from business cloud services — infrastructure resources, software applications and developer tools — was $22.2 billion last year, less than 2 percent of total technology spending, IDC estimates. But cloud revenue is growing at more than 25 percent a year, and will reach $55.5 billion by 2014, the research firm estimates.

Salesforce.com, founded in 1999, began selling customer-relationship software to businesses as an Internet service long before the industry began talking of cloud computing. Things built slowly at first, but Marc Benioff, founder and chief executive of Salesforce.com, says the turning point has come.

“What’s being called the cloud now is the future of enterprise software, but when I started in 1999 no one believed that,” said Mr. Benioff, who recently raised the company’s revenue forecast by 25 percent. “Sometimes you do have to wait them out.”

Contact Technology

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More

Squawk Alley