Software Business Forecast: Cloudy, but Clearing Up

“Cloud computing� may be one of the most aptly descriptive buzzwords to emerge in recent years: when you ask tech or business people what it really means, they generally offer fluffy, foggy responses.

Buzzwords rarely move conversations -- or profits -- forward. So it’s not surprising that many cloud computing companies currently are struggling to make money, as Sarah Lacy recently wrote in Businessweek.com.

Nevertheless, the technologies and businesses that comprise “cloud computing� have indeed become an important trend in modern software. That’s because cloud computing offers users compelling benefits over traditional software

Lacy described these benefits well: “...Low-priced, convenient delivery of applications. Buyers save on consultants, because vendors host the applications and just rent access via the Web. No more obnoxious upgrade cycles, because software is improved and tweaked daily. And if the software doesn’t live up to expectations? Just cancel. Businesses don’t invest in installing and configuring the software, so there is no lock-in. ...On-demand represented a welcome break from the traditional way of doing things in the 1990s, when swaggering, elephant hunter-style salesmen would drive up in their gleaming BMWs to close massive orders in the waning days of the quarter.�

Those benefits are so basic and so significant that any software company which fails to offer them today appears rather backwards. Consequently, most business software vendors have jumped aboard the cloud computing bandwagon. But they’ve done this different ways, which affects their respective profit outlooks.

To clear up this discussion, here are the four “buckets� into which cloud computing businesses currently precipitate:

1. 1. Ad supported. This is the best-established “traditional� model. It’s highly lucrative and has been around for years. Players include Google, Yahoo, Microsoft, and other internet giants.
2. Infrastructure and operations. These companies provide tons of raw computing power. Examples include Amazon, OpSource, Opsware (now HP), telcos, and even Apple (with MobileMe). In the short term, these businesses run at a loss. But in the long term, economies of scale mean there’s lots of money to be made here. To get started in this market, infrastructure cannot be your only business. You must have other robust revenue streams to support it until it matures.
3. Software vendors. These companies piggyback on the companies in bucket 2 above by leasing computing power as needed. Thus, they can control overhead costs, expanding only as demand warrants. This strategy provides global coverage with a much smaller investment -- which in term improves prospects for faster profitability.

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