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Steve Ballmer gets it.  While he discusses a strategic interest in search, his head is really in the clouds; in the coming transformation many are calling cloud computing.  I think he fully understands the cannibalization risk that Google (NASDAQ:GOOG) is posing in the long term as it delivers increasingly sophisticated applications as a service. 

Yet there is another storm now appearing on the horizon for cloud computing, in addition to some technology challenges facing the proliferation of virtualization in the data center. Collectively they represent substantial, multifaceted risks to the major technology players.

While the media buzz surrounding Google, Yahoo (NASDAQ:YHOO), VMware (NYSE:VMW) and Microsoft (NASDAQ:MSFT) has been particularly deafening this summer - between exec changes and various staged media events- the real story beneath the headlines is about a long term positioning battle being played out today between Microsoft and a new generation of upstarts over the delivery of software and how it’s monetized.

The  VMware versus Microsoft battle is really a precursor to the coming cloud computing dogfight between Microsoft and Google, because virtualization is a critical enabler of cloud computing.   And cloud computing will make certain technologies and capabilities strategic in ways that weren’t possible when data centers were cumbersome and inflexible.

Hypervisor Economics 101

The hypervisor revolution ignited by VMware enables new levels of flexibility and efficiency for managing even the most complex data center infrastructure, with point and click server management and movement.  Multiple virtual machines (servers) can share the same hardware, regardless of operating system and be easily moved from one hypervisor to the next.

That new level of flexibility can transform the economics of IT, by delivering servers and processing power on an as-needed basis, versus keeping all hardware powered on even if only for potential use.  Yet electricity savings are only part of the value proposition. 

By converting broad collections of servers running different dedicated operating systems into sets of VMs running on larger blade servers, IT departments can make changes with minimal effort and their racks and stacks can take up a fraction of the space as was previously required.  That could mean major transformations for service providers and large enterprises delivering applications to growing sets of users and partners.

Reducing power consumption and increasing agility could set the stage for a substantial shift to cloud computing.  Yet hurdles remain.  It is likely that virtualization security concerns have played a factor in VMware’s recent lackluster execution in the data center in 2008.  Virtualization security is one of the major hurdles to virtualization and cloud computing.

Virtualization Security

I’ve called the nature of many virtualized production deployments virtualization-lite, because data centers accept a lower payoff from virtualization (less flexibility, less consolidation, reduced savings on electricity, for example) in exchange for maintaining their security posture. Players like Blue Lane Technologies (my alma mater) and others will be among the first to see the transformation of the data center as they are capable of protecting fluid meshes of hypervisors, a limitation for many types of network security appliances.  That limitation has boxed in many virtualization projects into hypervisor VLANs, which substantially erode the business case.

Two Promising I/O Front Ends

Moving VMs around across hardware can also tie up additional processing overhead, which makes VMotion less than ideal at this time. Companies like 3 Leaf Systems and Xsigo Systems are addressing these challenges. As they grow they’ll be yet another proof point of the expansion of virtualization beyond hypervisor-VLANS, as their products enable greater flexibility.

There are also compliance and change management issues that might slow virtualization down and inadvertently buy Microsoft enough time to establish an even larger foothold in the data center market.  VMware has been very effective in leveraging its partner ecosystem in addressing these issues. 

Yet cloud computing faces a fair share or risks, including the biggest security story of perhaps the last ten years: the Kaminsky DNS exploit.

The New Storm Cloud for Cloud Computing

The last few weeks have seen a massive explosion in commentary on the DNS exploit discovered by security researcher Dan Kaminsky, Director of Penetration Testing at IOActive.  Since his discovery, an inadvertent series of blog posts on DNS cache poisoning exploit attack code has been published; and yesterday a ZDnet blog by security expert Dancho Danchev sited DNS cache poisoning attempts reported from multiple sources.  Recent research also notes that a majority of service providers have not patched their systems for the vulnerability.

Infoblox Vice President Cricket Liu, the author of DNS and Bind, called it one of the most significant vulnerabilities of all time.  Ironically, he was on a DNS Security: Old Vulnerabilities, New Exploits webinar with Dan Kaminsky just days before the exploit code was published.

The DNS exploit threatens the core integrity of the Internet, as it allows hackers to redirect traffic from exploited servers to spoof sites where they can gather personal information and engage in identity theft on a scale we have yet to experience.  That’s a bigger problem than when the “I Love You” virus inconvenienced computer users years ago; it is a major storm front for the future of cloud computing.

An untrusted Internet would be nothing short of an ecommerce disaster; its impact would go far beyond cloud computing.  It would be a major disruption for the software as a service model, as well as many other business models that have grown with the Internet.  That’s why I predict that core network services will become increasingly strategic to IT.  The integrity of the network is about to matter even more than ever.

As reported previously at Archimedius, Google and others have made considerable strides in delivering software as a service.  Their success could mean the eventual shrinking of the computer hard drive, the shrinking of the pre-installed software market, not to mention the shrinking of the shrink-wrapped software industry.

Microsoft seems to understand the risks and upside, and has focused on “search” as a strategic roadmap issue, along with its recent Hyper-V attack on VMware.  Yet the real Microsoft adversary is Google-driven cloud computing, and the spoiler issue for all of them is an untrusted Internet.  Until a few months ago, few saw this issue coming.  But now the vulnerability is known, exploits have been published and apparently attacks are now being launched. 

You will be hearing much more about these issues, players and risks in coming weeks and probably months as Google and Microsoft prepare for battle in the skies.

Stock position: None.

Source: The Coming Cloud Computing Dogfight: Google vs. Microsoft