Market Watch: Virtual Computers, Real Money

Will clouds be dominated by a few big players?

By Stephen Cass

At first blush, companies' demand for cloud computing seems rooted in their desire to save money. Because cloud services can be quickly rented on a pay-as-you-go basis, companies can avoid purchasing extra equipment in anticipation of inevitable, but unpredictable, peaks in demand. For IT executives whose budgets are shrinking during an economic downturn, "that's a huge ticket to take to their boards," says William Fellows, an analyst at the 451 Group, which studies enterprise technology. "They're being told to cut costs and do the same with less."

But cloud computing isn't only about cheaper IT; the technology also offers companies the flexibility essential for survival. "The economy has become much more volatile, not just in the past year, but over the past 10 years," says Erik Brynjolfsson, a professor at MIT's Sloan School of Management and the director of its Center for Digital Business. "The ability to be agile in your infrastructure is what separates the winners from the losers ... cloud computing is one of the most important technologies that affect the ability to maintain that level of flexibility."

In addition to letting startups bring products to market faster, with fewer developers and minimal initial investment (see "Making Art Pay"), cloud computing has allowed larger organizations to bypass cumbersome internal IT bureaucracies. "BP found out that tens if not hundreds of its developers were using credit cards to buy resources on Amazon Web Services to circumvent their internal processes," says Fellows.

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This suggests that the next big thing in cloud computing will not be an explosion in the number of companies like Amazon and Rackspace, which provide general-purpose, public cloud services, but the conversion of data centers within companies into private clouds. Companies can reap the technology's benefits by sharing resources among business units more efficiently and responding faster to their needs. Fellows says that his clients who have converted report a 30 percent saving on the cost of infrastructure.

Designing private data centers as clouds makes it easier for businesses to supplement their internal resources by tapping public clouds during crunch periods, a phenomenon known as cloud bursting (see "Conjuring Clouds"). That's possible because both clouds will have similar protocols.