Ahead in the clouds

01 Jan 2013

10 years of Vision: Google Trends suggests interest in cloud computing has never since reached the levels it attained when we wrote our piece for Vision 2013 and is now running at around 40% of its 2011 peak. Commercially, though, cloud has now been very widely adopted although it still accounts for only a small proportion of total IT spending.

In Vision 2013 we recognised the initial inflated expectations of cloud computing but identified the potential for businesses.

If you type ‘cloud computing’ into Google Trends, you’ll discover that web searches for the term in Google peaked in early 2011 and are now [at the time of writing in 2013] running at around 60% of that level. That might suggest it’s an old story – and indeed aspects of cloud computing have been around for many years – but in terms of its commercial impact it is as yet relatively embryonic.
 
That burst of enthusiasm for internet searches may be linked to the so-called ‘hype-cycle’ of expectations that is often observed with new technologies. This cycle moves through five phases, starting with the ‘technology trigger’ when the possibilities of the technology start to become understood and expectations build. It then moves towards the ‘peak of inflated expectations’ when all sorts of claims about how it is going to change the world start to run wild.
 
This is followed (inevitably) by the ‘trough of disillusionment’ as people realise those claims were overdone and doubts set in over whether it will ever get off the ground. This invariably exaggerated phase then gives way to the ‘slope of enlightenment’ as a more realistic appraisal of its potential takes hold, before moving towards the final ‘plateau of productivity’ phase.
 
The Google Trends data may indicate that cloud computing has moved past the peak of inflated expectations towards the latter stages of the cycle, although different aspects of it will be at different stages. This is illustrated in the following chart:
 
The hype cycle cloud computing graph for Investec Vision 2018
 
If so, the commercial importance may be about to become much more significant. Estimates vary – not helped by differing definitions – but some surveys suggest the market could grow to approaching $200bn per year (some of which will displace spending on ‘conventional’ computing) by 2020.
 
Cloud computing forecasts graph for Investec Vision 2018
 

So, what is cloud computing, and why is it important?

The information technology business is more prone than most to jargon, and it is easy to get bogged down in the argot. That isn’t helped by the fact that the boundaries of cloud computing – like those of the real things – are ill-defined, but there are some general characteristics that can be reasonably easily explained.
 
In essence, cloud computing entails the physical separation of computing resources (hardware and/or software) from the user, with the two sides connected via a network (e.g. the internet). So, instead of everybody in an organisation having a high-specification personal computer on the desk, with loads of memory and a suite of software programs installed, the desktop computer can be stripped right down to little more than a dummy terminal. 
 
The software and computing power is stored in a separate, central repository and can be accessed by users as and when required, via an internet browser.
 
Typically these resources will be hosted remotely and provided by a third party, which has important implications for the economics of cloud computing, as we shall discuss later. The use of cloud computing has been likened to an electricity grid because of the ability to access unlimited resource on-demand, paid for on the basis of how much is used (as opposed to everybody having their own power station, running continuously whether needed or not).
 
Lower initial costs to customers might encourage wider usage, with more regular cash flows and the opportunity to achieve greater lifetime revenues.
Within this framework, the range of resources provided can vary widely, allowing for different depths of cloud, so to speak. Here, we limit our discussion to a couple of the simpler manifestations. Probably the simplest level, and one with which many consumers are already familiar, is web-based email services such as Google’s gmail or Microsoft’s hotmail, in which messages are stored remotely and managed by the provider’s software and infrastructure, which are accessed via a browser.
 
The great advantage of this to the consumer is that the service can be accessed from any device, be it desktop, laptop or mobile. Indeed, increasing mobility is one of the key drivers of demand for cloud computing, while ever improving network connectivity is a major enabler.
 
A similar principle applies with Apple’s iCloud, which stores music centrally and allows it to be played on any one of a number of devices, and to Amazon’s Kindle for reading, but these services still require the relevant software to be installed on each machine that is used to access the content.
 
However, a further feature of cloud computing is the ability to access remotely-hosted software via the web – known as Software as a Service (SaaS). This, one of the more advanced facets of cloud computing, has several advantages for corporate users, including;
  • It allows them to use only what they need, as opposed to requiring multiple installations of software for which some users have only an occasional need
  • Payment can be made only for what is used, on a pay-as-you-go basis, rather than through large, upfront licence fees
  • It is highly flexible, particularly in the context of increased mobility, since access isn’t limited to devices on which software is installed; and
  • It is easy to manage, for example eliminating the need for installing software updates.
 
The implications of the changed pricing model under SaaS are significant to providers as well as users of software. On the one hand they will increasingly have to forego sizeable, upfront licence fees (a major driver of their appealing cash flow characteristics). On the other, lower initial costs to customers might encourage wider usage, with more regular cash flows and the opportunity to achieve greater lifetime revenues.
 
For corporate customers it is not just the potential to change the pricing model for software that has attractions. Many of them have a need for computing power that varies widely, either seasonally or through the day. This requires them to invest in and maintain a level of physical resource that is sufficient to meet their peak requirement but which has surplus capacity for much of the time.
 
One advantage of cloud computing is that, as with software, this infrastructure can be accessed – and paid for – only when, and to the extent, needed. Clearly, if infrastructure was built to support only one user the issue of excess capacity would be simply displaced from the user to the provider. Therein lies one of the key features of cloud computing – the ability to share resources.
 
Consider a simple example: two similar businesses, operating only during normal business hours but one located in the UK and one in New Zealand such that there is no overlap in the working day. Even if each uses its computer capacity to its fullest extent during opening hours, that capacity will be lying idle for around half the time. 
 
However, if they used shared resources, both businesses could be served by the equivalent of half their combined resources. Now imagine such an arrangement writ large across multiple users. This model, known as multi-tenancy, is the key to the business for cloud providers, for whom scale is all-important.
 
The idea of entrusting data like financial information to a third party understandably engenders caution.
If it all sounds too good to be true, it is not without problems. There are a number of reasons why, despite the apparent economic benefits, some companies may be reluctant to adopt cloud computing models. According to industry surveys, by far the most common concern, perhaps unsurprisingly, is security and confidentiality.
 
The idea of entrusting data – particularly things like financial information or medical records – to a third party whose servers are also being used by other, unknown, entities (including potential competitors) understandably engenders caution but in fact large, well resourced, specialist providers of cloud facilities are just as, if not more, likely to have effective security arrangements in place as a small business.
 
The use of a cloud can also provide an additional, or alternative, disaster recovery policy. One way of addressing security concerns, most applicable to larger companies, is to have their own dedicated, ‘private’ cloud. However, this approach is likely to yield fewer cost savings than using a ‘public’ cloud where resources are shared with other users and which could save perhaps 50% of the cost of an in-house system.
 
Unsurprisingly, given the potential rewards, many companies are rushing to embrace the new technology. Many of these will be unknown to most investors but some familiar names such as Microsoft, Oracle and Google are also actively engaged in the provision of clouds. So too is Amazon, which identified it as an opportunity to leverage its substantial computing resources which are often running at well below capacity.
 
Software vendors who are reconfiguring their businesses to operate via the cloud include Sage. Purveyors of ‘traditional’ IT solutions may suffer as a result of the disruptive influence of cloud computing but buyers of IT and, ultimately, consumers, should see a silver lining. 

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