We've touched on cloud computing in a few posts over the last year or so (invested in a few related names along the way), and Barron's had a good sized feature piece in the past month on the subject, although I think their choices of "winners" for the trend was a bit too "one size fits all." (In my mind's eye, only a few companies such as Salesforce.com (NYSE:CRM) or NetSuite (NYSE:N) are true pure play cloud computing companies.) Since it is a secular growth trend (which is where we want to focus longer term investment ideas), and many readers are small business owners (hence, there are real world applications for you), I thought this Wall Street Journal article offered a nice explanation of the topic. After my radio interview with the Mad Hedge Fund Trader a few weeks ago, I recalled a moment of panic when I was trying to think how to explain what exactly some companies, especially those in the technology space, do in "layman's terms" in a span of 20 seconds. It is not that easy - hence why I like this article - even if it's longer than 2-3 sentences. Effectively, in a phrase, cloud computing is "outsourcing your IT department," or, if you are a small company, the IT department you never had.
Hat tip to The Reformed Broker for finding this piece.
- For a lot of small-business owners, "cloud computing" is the latest IT buzzword to leave them scratching their heads. To demystify things, here's a primer for companies looking to wade into cloud services for the first time.
1) What are cloud services?
- Broadly speaking, any service or program sent over an Internet connection can be considered a cloud service. An outside vendor runs the servers and software, so the buyer doesn't have to worry about the technical issues in-house—and can focus on its own business.
- The services come in a number of forms. Many businesses are already familiar with one aspect of cloud computing: software delivered over the Web. Along with email services like Google Inc.'s (NASDAQ:GOOG) Gmail, there are programs that help salespeople keep track of customer information, such as Salesforce.com Inc.'s software, and backup data-storage services from providers such as Amazon.com (NASDAQ:AMZN),
- Some businesses don't just use software services, they buy computing power from vendors such as Verizon Communications Inc. (NYSE:VZ)—much like buying power from a utility. Let's say a retailer expects lots of additional business during the holidays, and its in-house servers can't handle the load of customer orders. The company might pay a vendor for the use of its servers, to shoulder part of the computing work as the need arises.
- Other companies, meanwhile, might buy computing power on a regular basis. They might drop one or more in-house servers entirely—or not buy the hardware in the first place—and let a vendor run their vital programs on its machines. Once again, the buyer would pay a fee based on how much computing power it used.
2) How much will they cost?
- Unlike traditional applications, which require hardware such as servers and IT staff for maintenance, cloud services don't carry many upfront costs. Consider software. Salesforce.com's offering for businesses costs between $5 and $25 per user each month. Google offers a host of programs including email, a word processor, video and a hosted Web site for an annual fee of $50 per user. For small businesses that have more extensive computing needs, such as drug laboratories with extensive software, cloud services could cost more than $1,000 a month.
- As for buying computing power, some providers charge for a certain amount of memory and computing configuration. Terremark Worldwide Inc. (NASDAQ:TMRK), for example, charges six cents an hour for one gigabyte of RAM and the equivalent of one processor.
3) How much will this save me?
- The primary savings come from the lack of capital expenditure to buy a program or equipment. Servers, for instance, run between $2,000 and $6,000, and companies might need to add multiple machines as demands on their IT system grow.
- There are other benefits, as well. "The real cost savings doesn't start and end at the physical server," says Mark White, chief technology officer for consulting firm Deloitte. "You're saving on systems administrators."
4) Are these services reliable?
- Yes. "The performance in the cloud is better than a solution found in a small or medium business," says Steve Hilton, an analyst at U.K.-based research firm Analysys Mason Ltd. "There's no arguing it."
- This is a big sticking point for many businesses. Many managers are reluctant to let their valuable data flow outside of their internal firewalls. And big-name vendors make more attractive targets for hackers. For instance, wide-scale denial-of-service attacks hit AT&T Inc.'s (NYSE:T) and Google's Web sites last year.
- Yet big vendors usually also have expansive IT staffs to handle problems and more resources to invest in backup measures and security. While the problems at, say, Google often get a lot of attention, they occur less frequently than glitches at a small company, analysts say.
Good metaphor at the end of the story ....
- IT managers compare the difference to leasing a car versus buying one. "Do your diligence," says Mr. Pawlikowski. "Make sure you know what you're getting into in terms of overall costs."