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The Cloud Computing Disruption

Cloud computing will have wide-ranging effects on the entire technology industry.

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We believe cloud computing will be a hugely disruptive trend for the entire enterprise information technology market. Massive cloud datacenters, such as those being built by  Microsoft (MSFT) and  Google (GOOG), offer enterprises the opportunity to outsource a portion of their datacenter needs. The cloud allows enterprises to purchase computing power on a pay-as-you-go basis, and this elasticity leads to potentially large cost savings. Enterprises can avoid large up-front capital investments in computing infrastructure and instead pay for only the computing power consumed. In addition, enterprises no longer have to provision for peak usage and thus will not have wasted excess capacity during nonpeak times. Enterprises can scale their computing power up or down as business needs dictate.

The providers of the cloud can reap massive economies of scale with their datacenters. According to estimates from  Amazon's (AMZN) James Hamilton, a very large datacenter (50,000 servers) enjoys a 5 to 7 times reduction in networking, storage, and IT administration costs versus a medium-sized datacenter (1,000 servers). The current generation cloud datacenters are built on an even larger scale. One significant source of these cost savings comes from the use of commodity hardware components by the cloud providers. For example, instead of purchasing servers from  Hewlett-Packard (HPQ) or  IBM  (IBM), or networking equipment from  Cisco (CSCO), or storage arrays from  EMC (EMC), Google builds its own servers, network switches, and storage systems from off-the-shelf commodity parts. The magic that makes Google's datacenters hum is the custom software the company has developed to distribute computing tasks and storage among its giant army of commodity servers.

Toan Tran does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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