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Is Cloud Computing the Next Big Thing, Again?


Investors, be aware that it could move at glacial-like speed.


Have you ever heard that if you keep your clothing long enough, it'll be back in fashion again at some point?

That's what came to mind when I saw the comments in Barron's this past weekend claiming that cloud computing will be as revolutionary as the Internet itself. Wow! I can't wait.

To be clear, the Barron's article is certainly not the first such assertion; the "cloudies" have been bubbling about the "new paradigm" for a while. However, the technology industry has never lacked for the next great revolution, and I think it's fair to say that the pundits have successfully predicted at least 25 of the last three such tectonic shifts.

According to an article published last year, "Cloud computing encompasses any subscription-based or pay-per-use service that, in real time over the Internet, extends IT's existing capabilities." Users are freed from the financial and technological constraints required to maintain the capabilities "in-house" and as such has access to the same functionality as services that are fully scalable with their needs.

Fifty years ago, that used to be called time-sharing. The handful of large financial institutions, a few universities, and some service providers that could afford expansive mainframe computers rarely had sufficient processing requirements to keep the machines busy. Consequently they "shared" that resource with others who couldn't afford the new technology on a subscription basis using a teletype machine and a phone line. If memory serves me correctly, a young Bill Gates had his interest piqued by just such an installation at Lakeside Academy way back when.

In the 1960s, time-sharing appealed to those who couldn't afford a computer, but today cloud computing will save me money. Sounds like opposite sides of the same coin.

The benefits of cloud computing are far and wide according to the high priests of the faith.

  • Cost is certainly the biggest as the need for direct and indirect capital expenditures is greatly reduced while your company and others share the costs incurred by the service provider.

    However, while capital expenses may be significantly lower, operational expenses will likely be significantly higher. All the claimed advantages will have to be paid for on some variant of a per-transaction fee and at some point the "lease versus buy" equation trips in far of purchasing.

  • Scalability can also be a big advantage if your demands for resources are growing rapidly and/or there are major jumps in peak processing needs.

    This is certainly a very real issue, particularly if your peak processing requirements are dramatically higher than the norm, but again it comes back to an economic calculation.

  • Reliability is claimed to be greater because of the ability to provide hot back-up resources.

    In this day and age I'm not certain that a service provider's reliability will be significantly higher than that of a competent IT organization. When you're considering that assertion, think of your cable company, your cell phone carrier, or maybe BlackBerry's (RIMM) email network.

  • Security is obviously a huge issue for any company and the cloud computing contingent believes that centralizing data will enhance the level of security.

    Those same people should remember that Lt. Gen. Walter Short (US Army commander, Hawaii, 1941) believed that centralizing all his planes at Hickem Field increased their security as well. And the rest, as they say, is history.

Don't get me wrong, I do foresee an increasing demand for software services being delivered over the Internet, particularly those services we may not use every day. And there are some applications that are essentially commodities that might best be performed by a specialist able to provide economies of scale. For example, there's really no reason for anyone to be processing their own payroll these days.

But ask yourself this, why isn't every company in the US using ADP, Paychex, or some other service provider? They've been around for decades and they work. The answers will vary but they'll range from inertia, control, fear, cost, culture, and a dozen other explanations.

As investors we can't get sucked into the hype associated with what's claimed to be the new paradigm. Follow the fundamentals and what they're telling you as opposed to any claims about how good it's going to be (i.e. "the check's in the mail").

In the case of cloud computing, it may turn out to be true, but I can tell you that most companies are risk adverse. As such they don't move quickly to change anything that's critical to their operations and currently works (If it ain't broke, don't fix it). Consequently, the next best thing since sliced bread could move with glacial-like speed and ultimately have little impact on your portfolio.

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No positions in stocks mentioned.
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