'Cloud computing' seen as next wave for technology investors
Merrill Lynch Note
David Hamilton, Financial Post Published: Wednesday, June 04, 2008
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Slated as the next paradigm shift in computer technology, "cloud computing" has the potential to shower billions in revenues on companies that embrace it. Companies that don't make the switch, however, may be left out in the rain.
In a recent research note The Cloud Wars: $100+ billion at stake published by Merrill Lynch, the burgeoning technology concept is seen as a $160-billion addressable market opportunity, including $95-billion in business and productivity applications, and another $65-billion in online advertising.
Cloud, unlike traditional computing, is free from the confines of desktop-based software. Bare bones computer terminals run and store programs from a third-party server connected to the Web, eliminating the chance that work is lost if the computer crashes. With applications automatically allocated on the server, clients are only charged for the space and services they use, bypassing the need to buy pricey in-house hardware.
According Merrill Lynch, there are 10 companies -- shown in the table here-- that will have increasing exposure to cloud computing that they identify as "core plays."
"Cloud equivalents exist today for most business and personal productivity apps," says Merrill Lynch analyst Justin Post. He sees the roughly $2-billion software segment switching over to OnDemand programs, noting that cloud applications for e-mail and word processing are now equivalent to traditional software.
The study says that Google and Salesforce.com are in a position to benefit from the concept because they deliver their core services through the Internet. Similar to electric utilities charging for the amount of services rendered, they open up opportunities for economies of scale by cost-effectively sharing IT resources.
"It's an entirely different way to think about supplying software and other computing functions," says Nick Carr, author of The Big Picture that describes how cloud computing will shape the future of the high-tech industry.
"I think for a lot of the traditional companies whether it is software companies like Microsoft, Oracle and SAP, or hardware companies like Dell or EMC, it's going to be a very tough transition to go from the old world to the new world."
Tera Capital president Howard Sutton says that virtualization software is one of the key expansion areas of cloud technology.
"VMware pretty much has all of the market share." Virtualization is the technology that makes "virtual" machines from physical ones. With it, devices such as servers or storage devices function as multiple virtual resources, increasing their efficiency.
Citrix has a virtualization product that it acquired from B. C.-based XenSource in 2007 that is competing against VMware, and Microsoft has begun to rollout virtualization product with official releases slated for the fall.
"For Microsoft, it's important for them to break into virtualization and they're trying to play catch up," Mr. Sutton says.
Cloud, or as it is sometimes called, software as a service (SaaS), is becoming pervasive and computer users are finding cloud applications useful for "non-critical" applications, according to a recent investment note by Goldman Sachs. Already, people are cloud computing when they are using Web 2.0 applications like Facebook and blogs.
Goldman Sachs analyst Sarah Friar says SaaS is becoming cheaper and easier for companies to switch to cloud systems. She anticipates "strong growth for the data migration market over the next several years with Informatica benefiting from the overall growth, as well as its customers switching from an in-house developed solution to productized software." She is also bullish on cloud computing trendsetter Salesforce. com.
For the time being, switching over to cloud computing remains more difficult for larger companies, but there will be more reason to make the move in the years to come.
"Given focus on integration, 'vertical' application providers are offering more integrated product suites," Ms. Friar says.
"[Small and medium-sized businesses] remain more open to SaaS adoption; large enterprises still view it as a riskier proposition."