Investing In Clouds Means Seeking Applications

Aug. 3.12 | About: LinkedIn (LNKD)

Technology journalist Adrian Bridgwater says clouds are a social phenomenon. They're not as important for what they do as for what they enable, namely closer connections among people.

This is not the way most investors see the technology. Most investors see companies involved in building clouds, like Rackspace (RAX), or developing cloud software, like Red Hat (RHT), as having more value.

But even Red Hat CEO Jim Whitehurst, speaking at his own company's annual Summit meeting in Boston in June, claimed his company and its competitors are just tool builders, that what will make cloud valuable is what people and companies do with the tools.

The first services born of the cloud are the social networks - Facebook (FB), LinkedIn (LNKD), Yelp (YELP), Twitter. This may be why Google (GOOG) practically had to build its own social system - it had built a great tool but was not using it.

Most of what is happening in technology today involves extending the reach of these cloud-based social networks to where people are at all times. Mobile devices are far more dependent on their online connections than desktops were, and it's the fact of the communication rather than the speed of the line that makes them powerful.

What Whitehurst is looking toward are companies transforming themselves, using these resources, enabling more customer self-service, extending their reach without spending more money.

The key investor takeaway from Bridgwater's report, and Whitehurst's speech, is that the money in cloud comes from using cloud, from building applications, and the key applications are those that connect minds most efficiently, the people behind the screens.

The metric on which to evaluate social is thus how a system helps smart people reach one another, and the value it gives their communication.

Which may be why LinkedIn has been such a winning stock. When evaluating other cloud applications, ask yourself these questions:

  • How big is its audience? (Facebook's is largest.)
  • How much value can it extract, or deliver, to each audience member? (LinkedIn leads there.)
  • Can it keep costs in line? (Google does best here.) And can it be monetized easily? (Google again.)

With cloud applications the question is no longer about scale or speed-to-market. They're about audience size, about value, about monetization.

Disclosure: I am long GOOG.