Cloud computing: Pie-in-the-sky concept or next big breakthrough on tech horizon?

By: AP
By: AP

To meet the computing needs of 16,300 employees and contractors at Genentech Inc., Pierce took a chance and decided not to rely entirely on business software from Microsoft, IBM or another long-established supplier that would have let Genentech own the technology. Instead, Pierce decided to rent these indispensable products from Google Inc.

The Internet search and advertising leader will run Genentech's e-mail, as well as some word processing, spreadsheet and calendar applications, and it will do it over an online connection - an unconventional approach called "cloud computing."

The decision has turned Genentech, a biotechnology pioneer, into a lab rat for Google and other alternative software services trying to convince skeptical corporate decision makers that cloud computing is more than a pie-in-the-sky concept.

In the process, Google Inc. hopes to bleed revenue from Microsoft Corp. and surpass its biggest rival in the race to control the gears of computing.

Genentech's chief executive, Arthur Levinson, sits on Google's board of directors, but Pierce insists those ties didn't propel his leap of faith.

After lengthy internal testing, Pierce became convinced that Google can be trusted to provide critical software programs for Genentech as adeptly as it deciphers Internet search requests to sell ads.

"You don't want to get caught clinging to the past," said Pierce, Genentech's chief information officer. "I feel like we are surfing in front of the wave instead of the back of it."

Cloud computing has already swelled into an estimated $36 billion market this year, representing roughly 13 percent of global software sales. The big question now is whether it can turn into a technology tsunami that sweeps Microsoft and other software industry staples into obsolescence.

Yet for all the potential and hype surrounding cloud computing, breaking old habits won't be easy - particularly with business-software powerhouses Microsoft, IBM Corp., Oracle Corp. and SAP AG all maneuvering to protect their existing, lucrative software franchises while also setting up their own online services to compete with the industry upstarts.

Even Genentech, the biggest U.S. company to buy Google's applications package so far, isn't ready to abandon Microsoft entirely. It's still licensing Microsoft programs like Word for writing documents and Excel for creating spreadsheets.

Typically, companies own their own software, which requires installing programs on disparate computers followed by years of expensive upkeep to keep the technology humming. In contrast, cloud computing lets companies have someone else run their software remotely for a monthly or annual fee, with users accessing the programs over live Internet connections.

The idea has won over small business owners, government agencies and schools, and now larger companies are taking a closer look, particularly as they look for ways to save money during a brutal recession.

"Almost everyone already runs a lot of their personal life on the Internet and there is no doubt that the future of business applications will be there too," said Zachary Nelson, head of cloud computing specialist NetSuite Inc. "It's just a matter of when companies are ready to make the move."

Former Oracle executive Marc Benioff planted the seeds for the cloud computing movement nearly a decade ago when he brazenly declared "the end of software" and started Salesforce.com Inc. to sell subscriptions for a customer-management program accessed over the Internet.

Benioff's San Francisco-based company is now the largest cloud computing service for businesses, with a market value of $4 billion, about 52,000 customers and revenue totaling $1 billion in its past four fiscal quarters.

But Salesforce's income of $37 million during that time translates into a measly $3.70 profit on every $100 in sales. That looks anemic alongside Oracle's net margin of about $24.80 for every $100 in sales in the comparable period.

And San Mateo-based NetSuite still hasn't eked out its first quarterly profit after a decade in business, despite steady growth that boosted its revenue during the past four quarters to $143 million.

The slim profit margins reflect the expenses cloud computing providers must absorb to build big data centers and hire the engineers to run their software applications, while they charge relatively modest fees to use their service. What's more, they don't require their customers to pay additional money for product updates and maintenance - a gold mine for traditional software makers.

Amazon.com Inc. is among the other prominent backers of cloud computing. The Seattle-based retailer runs a Web services arm that leases data storage space and computing power to businesses much like a utility dispenses electricity, as needed, to its customers. The initiative has attracted hundreds of thousands of business users during the past two years, but analysts say it has been a financial flop so far. Amazon.com doesn't break out the unit's results.

Google doesn't disclose the results of its business applications division, but it's relatively small, too. The Mountain View-based company's non-advertising operations generated combined revenue of just $540 million during the past four quarters, while Google's advertising sales totaled $20 billion.

After studying cloud computing trends, Sanford Bernstein analyst Jeffrey Lindsay predicted Google's applications will rake in revenue of about $1.5 billion by 2012, a small share next to the estimated $18 billion for Microsoft's desktop office software.

Oracle CEO Larry Ellison doubts cloud computing will ever produce big enough profits to finance the hefty investments required to develop products sophisticated enough to satisfy major companies.

Ellison has gone so far as to draw derisive comparisons between cloud computing and Webvan, an online grocery delivery service that was supposed to spell the demise of traditional supermarkets, only to go bankrupt in 2001.

"It's ludicrous (to think) that cloud computing is taking over the world," Ellison said during Oracle's annual shareholders meeting in October.

The dismissive remarks were striking given that Ellison was an early investor in Salesforce and even sat on the company's board before getting into a rift with Benioff. What's more, Ellison is the majority owner of NetSuite, with a 53 percent stake in the company.

Nelson insists Ellison hasn't lost faith in NetSuite.

"We can be as profitable as a traditional software company," Nelson said. "We are still in a growth cycle."

Microsoft is angling to protect its position as the world's largest software maker by planning what it calls a new operating system for cloud computing, called "Azure," that is supposed to make it easier to toggle between programs stored on a hard drive and on the Web. Microsoft has also said it will launch Web-based versions of its Office programs, including Word and Excel, but has not yet set a date.

Dave Girouard, who heads Google's cloud computing services for businesses, believes Microsoft's expansion will only bring more credibility to the concept and help his company sign up more paying customers.

Although it refuses to provide a specific breakdown, Google acknowledges most of the roughly 1 million businesses, government agencies and schools using its office applications rely on a free version. For nearly two years now, Google has been peddling a more sophisticated package that costs $50 annually per employee account.

The economics appealed to Genentech. Based on the number of Genentech employees granted Google software accounts, the South San Francisco-based company is paying at least $800,000 per year for the online package.

Buying and maintaining a similar software package from Microsoft, Oracle or IBM would have cost considerably more, though Genentech declined to say how much it saved by subscribing to Google's office package. Whatever the figure, the savings for Genentech won't stop there. Pierce figures the company eventually would have had to invest $70 million to $80 million to build a data center, full of computer servers, to run its software and might have had to hire more engineers and technical specialists.

"That's a huge amount of cost that won't generate $1 in sales for my company," Pierce reasons.

Barbara Nielsen, a management associate at Genentech, likes having the choice between the competing programs offered by Google and Microsoft. In the first several weeks of using Google's software, she found its word processing and calendar programs helpful for jointly working on projects with more than 50 people spread across her division.

Collaborating on team projects is easier on Google's applications because employees can edit their work from any computer with an Internet connection and then store their work so it can be reviewed and possibly expanded upon by another worker somewhere else. In contrast, employees jointly working on Microsoft's traditional office programs must send revisions back and forth.

But Nielsen still feels more comfortable using Microsoft's Excel program when she needs a spreadsheet application, partly because she prefers its features.

"We are just starting to be enlightened" about the Google applications, Nielsen said. "I don't see them as a replacement for Microsoft. I see them more as a companion."

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