Cloud computing in a bubble economy

Cloud computing is the IT world's latest hot topic, and it's no secret why. In tough times, when capital expenditure budgets are under severe pressure, any pay-per-use solution looks like a winner.

If you give enterprises a credible outsourced alternative to their internal platforms and applications -- one that requires no capital outlays, long-term contracts, data-center infrastructure or internal IT staff -- users can scale that service up or down as their needs and fortunes expand or contract.

Clearly, cloud computing -- as a purely on-demand service-delivery model -- is tailor-made for a bubble economy, such as the world in which we live. In a bubble economy, volatility rules, prices fluctuate wildly, and acute uncertainty and risk permeate everything. Even more distressing, this dynamic new order can destroy established industries, vendors, business models and investment portfolios with sudden, sickening speed.

As we've seen in the financial and automotive industries, valuations can collapse overnight, thereby dislocating lives, careers and communities without much warning. As the economic outlook deteriorates, survival strategies and last-ditch tactics -- such as shotgun mergers -- quickly preempt sound business planning.

Does anybody truly believe that established IT market segments are immune from the brutality of the bubble economy? Hey, let's admit that the IT industry was in fact the proving ground and remains one of the chief enablers of this new economic order. If we learned anything from the dotcom bubble, it was that the frictionless business formation of an on-demand economy can prove disruptive in both the good and bad senses of that word.

Yes, on-demand services contribute to innovation, efficiency and agility throughout the IT world. But fast-bubbling start-ups can also, in the same bold burst, mortally wound established IT vendors before they know what hit them. And this same process can just as rapidly doom the disruptors themselves -- whenever the next cloud of fresh bubbles emerges to suck away their oxygen.

Excessive business risk is the thunderclap inside the world of cloud computing, and it can zap IT suppliers and users with equal devastation. If you've invested in a traditional IT solution that now confronts a significantly more cost-effective cloud-based rival, you'll be hard-pressed to survive if one of your competitors has leveraged that alternative to pare its cost structure to the bone.

And if you're counting on your established IT vendor to migrate you gracefully into its own emerging cloud-based environment, think again. Focusing on short-term financial results, its shareholders are demanding that it leverage the traditional cash cow of software license fees and maintenance revenue to the hilt. To the extent that your traditional IT supplier encourages you to adopt its new cloud-based offering, it will often be just a grudging nudge, a last-ditch effort to hold onto your business.

When looking at the cloud-computing horizon, no two IT industry observers agree on which solution vendors will ultimately prevail -- just as analysts in the financial and automotive sectors have no idea whether Citibank or General Motors will survive this period in anything resembling their current forms. How will Oracle, HP, IBM, Microsoft, Cisco, EMC, SAP, and other blue-chips weather this chaotic cloud front of tornadic start-ups?

Yes, the big guys all have their cloud initiatives, to varying degrees of maturity. But they all tremble before the possibility that such cloud-based pure-plays as Google, Amazon.com, Salesforce.com, or Akamai Technologies will lure away customers with more flexible, lower-cost offerings.

Established IT vendors are trying a bit of everything to keep their core businesses from slipping away. Fundamentally, they're all approaching cloud computing as a sort of Venn-style conceptual bubble diagram, one that converges software-as-a-service, service-oriented architecture, virtualization, utility computing, outsourcing, open source, Web 2.0, social networking and pretty much every other IT trend of the past 10 years. What the incumbents hope is that some magic synthesis of these approaches will help them hang on through this turbulence and prevail into the next era.

Let's be honest with ourselves. We all know the IT industry is in the throes of a major shakeout and some familiar names may not survive much longer. We may have to endure our fair share of shotgun mergers among veteran IT providers before we see the rainbow that signals the end of today's perfect storm. Silver linings are there in today's increasingly cloud-oriented environment, but they're hard to glimpse through the layers of macroeconomic gloom.

This story, "Cloud computing in a bubble economy" was originally published by Network World.

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