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Oracle (NYSE:ORCL) sells what many analysts call "faux" cloud.

David Linthicum of Information Week says that what Oracle is selling as "Infrastructure as a Service" is, in fact, the usual data center gear. The price customers pay is just for hardware - software is extra, and peak use is higher.

While Oracle co-president Mark Hurd objects to the claim that his cloud is fake, he is also quick to point out that it also has 25 million users and is already generating a billion dollars worth of revenue. My old German teacher used to put it better - "call me sour, call me kraut, but don't call me late for supper."

Investors may be asking themselves, if Oracle's cloud is fake, why is it so popular? It's so popular because, despite its high cost, and despite its false claims, it's cheaper for enterprises to continue using Oracle's software than to go to the expense of switching to real cloud infrastructure. The customers are captive, they know they're captive, but as long as the price isn't too painful, they will pay. Because the cost of switching is too high.

Cisco (NASDAQ:CSCO) is one customer that has gone to the expense of switching. The conversion began in 2009, Charles Babcock writes, and is only now nearing completion. The ownership costs of what is now a "private cloud" have dropped from almost $79,000 to $36,500, and will drop to under $25,000 once self-service provisioning is implemented. That's the current costs, however. We're not talking about the costs of building one system while another is still running, the cost of running both concurrently, and the cost of training, which turned out to be considerable.

All this helps explain why ORCL is still making money, whether its cloud is faux or not. But any company sponsoring a faux cloud needs to assure investors it has captive customers who really can't afford to switch away, or you're looking at a black hole of an investment.

And even ORCL has promised that it will, over time, migrate its customers into something more like a real cloud. The age of client-server computing is truly ending, as even those who refuse to acknowledge it publicly know. And with that end come cost savings that also represent lost revenue to many vendors.

For most, in the end, cloud computing is a "shrinking waterhole." Some companies can milk the transition, but not forever.

Source: Selling What Oracle Calls Cloud