What’s with that Cloud?

Cloud computing has been given much hype. Even more traditional rags like The Economist are covering it. It is definitely an exciting technological movement, but I don’t think it really changes things for the average end-user. One of the biggest benefits of the cloud is economics. It provides cheap storage and scalability, which enables small to medium-sized companies to ramp up faster and compete more effectively with the big guys. The big guys—Microsoft, Google, Amazon, Apple, IBM, etc.—have been cognizant of the importance of the cloud and are offering up their own web services and application development platforms. Of the big guys, the ones that execute their cloud strategies best will gain greater entrenchment and integration with the smaller guys and consumer facing companies as they scale, such as a Twitter or one of the many budding iPhone applications companies. The cloud becomes a necessity for these players to remain cost-competitive and relevant to their enterprise customers.

But for the average end-user the cloud is mostly back-end technology that might not be a very noticeable game-changer in day-to-day computer use. Indirectly, the end-user will reap great benefits. New startups mean more innovation and smarter aggregation of information for users, but it will be hard for a consumer to say, “Wow, the cloud is great,” because the consumer doesn’t care where the data is coming from. In fact, other than Office-esque productivity applications run from the desktop, most people already meet most of their computing needs on the Internet, whether through webmail, social networks or other SaaS platforms.

The benefits of the cloud might be least obvious for the investor. Greater demand for IT hardware and software required for cloud infrastructure will definitely create a short-term spike for hosting and server companies. Companies like Amazon and Rackspace, of course, are already taking in fees for their cloud-based services. These ‘dumb’ services alone, however, will become commoditized much like webmail. Perhaps, the companies adding an extra layer of ‘value’ should be the target investments. Union Square Ventures invested in the open source cloud development platform, 10gen. Companies like GoGrid are pushing their services to help IT managers control and monitor their use of the cloud.

Perhaps, venture capitalists will also discover most of their cloud-related opportunities indirectly. Web 2.0 generally showed VCs that startups can get off the ground more cheaply and develop real technology before seeking funding. Maybe the cloud will allow early-stage companies to gain real distribution and generate revenue before needing that Series A.

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