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Everyone is talking about cloud computing. Forrester projects that the total market for cloud computing will be $241 billion by 2020.But what does cloud computing mean, exactly?
Cloud computing means computing can be used as a service rather than a product.
This has become possible because it’s now cost-effective for companies to build huge data centres where computing and software can be provided remotely at massive scale and rented out, like a utility service.
Large amounts of storage and processing power are now ubiquitous and cheap. Few of us generate our own electricity: instead we rely on the pooled resources of an electric grid, use what we need and pay by the meter. The same is now possible with computing.
What does this mean, in practice?
- For consumers, the cloud, plus the emergence of smart mobile devices like smartphones and tablets, means that we are, in fact, moving to a “post-PC world.” We’ll still be using personal computers, but instead of each person having one central computer which they use for the vast majority of their computing needs, each person will have several devices (work computer, home computer, smartphone, tablet…) with their data and software synced between devices, through the cloud. Think of web-based email, which has been around since 1995: all your email is stored on servers around the world, and you can access it from wherever with whatever device, and have all your info. With the cloud, this is increasingly true of all the things we use computers for: productivity (Google Docs), file sharing (Dropbox), music (Spotify) and so on. For consumers, the cloud also means that software can be delivered and used through the internet, which threatens to disrupt desktop software incumbents like Microsoft. Productivity software is an example: Right now online apps like Google Docs can’t match the functionality of desktop apps like Microsoft Office, but we are headed in a direction where they will. And, in classic “Innovator’s Dilemma” fashion, though online apps are inferior, they have crucial advantages such as being free and ubiquitous, and they are getting better every day.
- For startups and technology companies, the cloud means a drastic increase in capital efficiency. It is now cheaper than ever to start a new service, and easier than ever to scale it. This is largely achieved thanks to Amazon Web Services, the company’s cloud computing arm, which is growing like gangbusters (see chart above). In 1999 it cost $150,000 a month to run a web application in the then-nascent cloud; now the same application would now cost just $1,500 a month on Amazon. We pointed to Instagram, with 9 million users and half a dozen employees, as exemplary of this trend. When people talk about startup valuations rising, they should keep in mind that the cost structure (and addressable market) for web startups is now radically different from what it was only a few years ago.
- For large businesses, the cloud turns computing from a capital expense to an operating expense. There are technical challenges and security challenges for many large companies to moving to the cloud, but over time it should make managing and using computing resources a lot more efficient for large companies. It also represents a large opportunity for enterprise software startups to displace incumbents with cloud-based solutions that are sold as a service. For example, after PeopleSoft, a maker of desktop software for human resources management was acquired by Oracle, the founders of the company launched Workday, which also does human resources management but is delivered from the cloud as a service. When we interviewed co-founder Aneel Bhusri, the company already had 250 large enterprise customers.
Photo: Wikimedia Commons
Cloud computing also has critics, who note drawbacks:
- Security. You are, after all, handing your data to a third-party over the internet. And people are understandably paranoid about that.
- Reliability. If the cloud goes down (and there is no such thing as 100% uptime; Amazon Web Services, generally considered the gold standard, had devastating downtime earlier this year) then your apps go down. Cloud advocates say that the costs involved with the (admittedly rare) downtimes are much lower than the costs of desktop software, which can also be unreliable (bugs, crashes) and has expensive upgrades, unlike cloud software which is upgraded seamlessly.
- Also, most cloud companies also charge more for spikes in usage, which may lead to unpredictable costs.
“Cloud computing” is a catch-all term and covers many industries and many different segments. What’s more, because it has become a buzzword, many people describe themselves as “cloud computing” no matter how warranted that is.
But despite real drawbacks and a bit of hype, cloud computing remains a fundamental, very important trend. It is, as The Economist put it, the world’s “first global utility.“
It’s a new paradigm for computing which affects everyone, and with it come gargantuan business opportunities.
In forthcoming notes, we’ll be exploring the companies and business models that leverage the cloud.
This note was published as part of BI Research, a new industry intelligence service from Business Insider. The service is currently in beta and is free. To learn more and sign up, please click here.
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