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Few technology trends have captured as much popular attention as Cloud Computing. The level of hype associated with the ‘Cloud’ hasn’t been seen since the hoopla created during the Dot.com era. As a result, there has been plenty of debate about whether the Cloud Computing phenomenon is headed to a similar demise.

This quote is taken from a Seeking Alpha article by Jeffrey Kaplan, published in December 2010.

Just a few weeks after Jeffrey's comments, two separate but similar acquisition moves of cloud computing providers, made by Verizon (NYSE:VZ) and Time Warner Cable (NYSE:TWC), have investors wondering whether the multiples used in these transactions are a reminder of the past “bubble times” or the sign of a new revolution coming.

Cloud computing may be considered the natural evolution of virtualization and utility computing. The key characteristic of cloud computing is that the computing is "in the cloud", i.e. the processing (and the related data) is not in a known place.

From a consumer point of view, it is a relatively simple process to explain if you can use an example: cloud computing is what happens when you check your Gmail account. You do not really know where your data are, but you do enjoy the fact that you're allowed to access your emails from several location (home or office computer, mobile phone, etc.), with little to no knowledge of the technology making it possible. A real revolution, when you think about it.

From an enterprise point of view, cloud computing avoids high CapEx spent on hardware, software, and services, as you pay a provider only for what you use. Quite a change in the way you think about computing, and in your costing.

In recent times, venture capitalists pumped millions of dollars into cloud computing start-ups, which may be seen both as a sign of the great potential for the sector or as an omen of a bubble.

A Gartner's recent survey shows that cloud computing services are the top CIO priority for this year:

According to Gartner's findings, CIOs will adopt cloud computing services at a swifter pace than originally predicted. Gartner said 3 percent of CIOs currently have the majority of their IT environments running in the cloud or on SaaS technologies, but over the next four years that is expected to jump to 43 percent.

Such a paradigm shift can very well explain why Telcos may be looking at cloud computing (which needs their infrastructure to reach end users) as a way to increase their revenues and create a closer relationship with customers.

Back to the original question, bubble or revolution? The answer may be obtained by changing the question: how about real revenues and profits in the sector? At least, this approach worked very well during the bubble times...

If we examine the recent Verizon's acquisition of Terremark (NASDAQ:TMRK) trying to get a sense of the multiples paid for its cloud computing offering, and using this revenues/profit approach, the answer may be scary.

Verizon paid a little over $2 billion for Terremark, including debt. The strategic reason for the acquisition was explained by Verizon's President & COO, Lowell McAdam, during the conference call following the news:

This transaction will accelerate Verizon’s everything-as-a-service cloud strategy by delivering a powerful portfolio of highly-secure, scalable on-demand solutions to business and government customers across the globe.

As we looked at how best to position ourselves for opportunities in this market, it became increasingly clear to us that a purely organic build would not get us into this rapidly evolving market as fast as we wanted. At the same time, it became clear as we worked cooperatively with Terremark on other joint commercial activities, that they would bring as much of what we needed and accelerate us on a path to leadership in cloud services.

If we look at Terremark's latest results, cloud computing is running at a 37.5 million annual run rate – or just about 10% of Terremark's revenues (click to enlarge):



Here is a comment made during the Q&A section of the conference call:

David Barden - BofA Merrill Lynch - Analyst

The second question was just trying to parse this down a little bit more, Lowell. Terremark I think in the last quarter reported something like $7.5 million of quarterly cloud revenues, which seems like a very, very, very small number for a Company as large as Verizon, and for them to come out and say that that is something that they couldn't have done by themselves and they needed to buy this company to accomplish, seems strange.

But I guess what does seem more plausible is that what Terremark has is the raw material, the co-location, the relationships, the people, that, as you say, would take a long time to develop independently to be in a position to then develop the cloud opportunity.

So I guess as we try to look across the rest of the sector and understand is are you really buying this company for the $7.5 million of cloud revenues or are you really buying it for all of the things that it has put together to put you in a position to try to leverage the future cloud opportunity?

Lowell McAdam - Verizon - President & COO

David, you did probably a better job of answering the question than I could, to be honest. I think that's it. As we've gotten to know the team, and you look at all the -- to me it is foundational elements, it's the cornerstone that you would need to build the business on. And I think we can provide the jet fuel that will help them really take off, but they have really done the hard work of getting the data centers in Culpeper and in Miami and the other ones around the country and around the world, and they have assembled a team that knows the security side of it and the applications, and how to run world-class centers. They've got all the relationships with the key federal government and the large enterprise customers, so we think we can really kick this into a higher gear as we say. So that's what we bought here.

As to profits, Terremark has about $ 417.5 millions of accumulated deficit, and is not profitable, yet.

There's obviously more than the Terremark-Verizon deal to evaluate cloud computing.

While hosting in data centers is common today with many companies, cloud computing represents something bigger and better than just hosting. It brings the necessary technology, cost efficiencies, and bandwidth together finally to present businesses an environment suitable for moving from the client/server model to an IT as a service model.

Cloud computing truly represents the evolution of technology. Time will share winners and losers in the sector, as it always happens when a new business is born. First time movers will benefit from their predominant position, most likely.

As investors, we'd like to emphasize that the data center remains at the heart of cloud computing and every cloud-based service. All the applications and services we retrieve or consume in the cloud eventually reside in some data center – a good reason not to forget the main players in this sector – the Equinix (NASDAQ:EQIX) kind of guys, whose customers are not only emerging cloud companies, but financially sound enterprises, banks and financial services, content companies, network providers, etc. etc.

Source: Cloud Computing: Bubble or Revolution?