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Investment Implications of Cloud Computing

Cloud computing will be disruptive to traditional data-center technology vendors.

Sunit Gogia, 03/30/2010

The impact of cloud computing on the enterprise computing landscape is reminiscent of the shift from big mainframe systems to client server computing in the '90s. A step change in the economics of computing is driving this transformation and creating opportunities for new providers, while threatening the established business models of traditional application software and data center technology vendors. Established vendors such as Microsoft MSFT, SAP SAP, Cisco CSCO, IBM IBM, HP HPQ, Dell DELL, EMC EMC, and NetApp NTAP could face significant headwinds as public cloud computing gains customer acceptance.

The Public Cloud
Cloud computing has evolved into a broad term encompassing all manner of remotely delivered computing resources and services. Broadly speaking, uniform IT services provided remotely to multiple customers from third-party controlled data centers have been christened the "public cloud."

The public cloud generally features large scale data centers comprised of commodity hardware orchestrated by custom management software. There is a wide variety of public cloud services, but most share the following attributes:

* Utility Model: Customers pay for public cloud computing services on a subscription or metered basis, replacing fixed up-front IT capital expenditures with variable operating expenses.

* Elastic Resources: Customers can access additional cloud computing capacity as needed, thereby eliminating the need to permanently provision capacity for peak demand.

* Shared Resources: Users share computing resources with other customers using virtual rather than physical data and processing partitions.

For the purpose of this discussion, we segment the public cloud market based on the tier of service provided, with each tier sharing certain economic characteristics. A conceptual representation of the service tiers is shown below. Computing infrastructure (servers, storage, networking) forms the physical foundation on which software platforms (application runtime environments, databases) are installed. End-user applications such as customer relationship management software are built and deployed on the software platform. Public cloud customers can lease capacity at any tier: software applications (software-as-a-service), software platform (platform-as-a-service), or raw infrastructure (infrastructure-as-a-service).

Software-as-a-service has the longest track record among cloud services and growth remains strong, but barriers to entry are lower than traditional on-premise application software. SaaS involves software applications running in remote data centers accessed by customers over the Internet. In its most scalable form, vendors employ a multitenant approach where the same basic software is shared by multiple customers, with some opportunity for customization. Customers benefit from the subscription model as well as ease of adoption and management--accessing a new SaaS service can be as easy as pointing a web browser to a specific web address. The list of SaaS vendors is very long and growing by the day, but prominent examples include  Salesforce.com CRM and  NetSuite N.

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