A special report on corporate ITOctober 25th 2008

Let it rise

CorpITCOVindd 1CorpITCOVindd 1 131008 105801131008 105801

The Economist October 25th 2008 A special report on corporate IT 1

Information technology is turning into a global cloud accessiblefrom anywhere says Ludwig Siegele What does that mean for the waypeople conduct business

ingbecame more distributedNow this special report will argue

computing is taking on yet another newshape It is becoming more centralisedagain as some of the activity moves intodata centres But more importantly it isturning into what has come to be called acloud or collections of clouds Computshying power will become more and more disshyembodied and will be consumed whereand when it is needed

The rise of the cloud is more than justanother platform shift that gets geeks excitshyed It will undoubtedly transform the inshyformation technology (IT) industry but itwill also profoundly change the way peoshyple work and companies operate It will alshylow digital technology to penetrate everynook and cranny of the economy and ofsociety creating some tricky political proshyblems along the way

Promise of heavenHere we go again you may think In orderto generate new demand the maturing ITindustry keeps creating new buzzwordsoften with celestial connotations (cybershyspace blogosphere) which suggestsome kind of technological nirvana Thereality is much more down to earth

Hype is indeed rampant in cloud comshy

Let it rise

IN THE beginning computers were hushyman Then they took the shape of metal

boxes lling entire rooms before becomshying ever smaller and more widespreadNow they are evaporating altogether andbecoming accessible from anywhere

That is about as brief a history of comshyputers as anyone can make it The point isthat they are much more than devices in abox or in a data centre Computing hasconstantly changed shape and locationmainly as a result of new technology butoften also because of shifts in demand

The rst computers were indeed peoshyple The word originally meant an individshyual who solved equations often using amechanical calculator Hundreds of themwere employed by big companies thatneeded to do a lot of numbershycrunchingsuch as aeroplane manufacturers It wasonly around 1945 that the word came to deshyscribe machinery

But even after that computing kept unshydergoing mutationsor in the jargon platshyform shifts The mainframe the originalcomputing platform was dethroned byminicomputers which in turn gave way topersonal computers which are now beingpushed aside by handshyheld devices andsmartphones With each step the architecshyturethe underlying structure of computshy

An audio interview with the author is at

wwweconomistcomaudiovideo

A list of sources is at

wwweconomistcomspecialreports

Where the cloud meets thegroundData centres are quickly evolving into servicefactories Page 3

Creating the cumulusSoftware will be transformed into a combination of services Page 5

On the peripheryThe cloudrsquos communications with its clientswill become ever more intelligent andinteractive Page 7

Highs and lowsAs IT gets cloudier the economics of thebusiness will change Page 9

The long nimbusThe cloud will make businesses moreadaptable interconnected and specialisedand often smaller Page 11

Computers without bordersThe cloud may be the ultimate form of globalisation Page 13

Also in this section

AcknowledgmentsThe author would like to thank many people besides thosecited in the text for their time ideas and kindness duringthe preparation of this report They include MarcAndreessen of Ning Brian Behlendorf of CollabNet ChrisCapossella and Tim OrsquoBrien of Microsoft Simon Crosby ofCitrix Rob Enderle of Enderle Group Robert Hodges ofContinuent Dirk Holzwarth of Alstom GregPapadopoulos of Sun Microsystems Dennis Quan of IBMSimeon Simeonov of Polaris Venture Partners Rahul Soodof SAP and Kishore Swaminathan of Accenture

1

2 A special report on corporate IT The Economist October 25th 2008

2 puting The term entered into ITshyspeakonly a year ago and has spread vorashyciously Cloud conferences and cloud blogsare multiplying almost as quickly as cloudstartshyups Established IT rms are slappingthe new label on old gear

In fact the cloud craze may havepeaked already if the number of Googlesearches is any guide (see chart 1) Cloudcomputing is bound to go through atrough of disillusionment as Gartner aresearch rm calls the phase in the hypecycle when technologies fail to meet exshypectations and quickly cease to be fashionshyable Much still needs to be invented forthe computing sky to become truly cloudy

Yet even if the term is already passeacute thecloud itself is here to stay and to grow It folshylows naturally from the combination ofever cheaper and more powerful processhysors with ever faster and more ubiquitousnetworks As a result data centres are beshycoming factories for computing serviceson an industrial scale software is increasshyingly being delivered as an online serviceand wireless networks connect more andmore devices to such oerings

All this allows computing to be disagshygregated into componentsor servicesin IT parlance This is why European techshynologists such as Lutz Heuser head of reshysearch at SAP a German software giantlike to refer to it as the internet of sershyvices The cloud metaphor seems moreapt The internet is used mainly by peoplewith personal computers and a physicalnetwork connection Cloud applicationson the other hand will be used by billionsof devices of all kinds many of them unshytethered but will be connected to the inshyternet of things

In some ways the cloud is already hangshying in the sky especially for consumers Acshycording to a recent study 69 of Amerishycans connected to the web use some kind

of cloud service including webshybasedeshymail or online data storage (see chart 2)The best example is Google the biggest onshyline search company by far which now ofshyfers a plethora of webshybased applicationssuch as wordshyprocessing or online spreadshysheets

Learning to oatCompanies too have been moving intothe cloud albeit much more cautiously Fishynancial institutions in particular have forsome time been building computinggrids Firms that provide enterprise softshyware as a service (SaaS) over the internetsuch as Salesforcecom and NetSuite havebeen growing steadily

In the years to come companies are likeshyly to venture much farther For one operashytors of computing clouds such as Amazonand Google have shown that this is a farmore ecient way of running IT systemsSecondly many rms will nd they haveno choice The way in which their IT infrashystructure has grown is proving unsustainshyable Most corporate data centres today arecomplex warrens of underused hardwarethat require more and more people spaceand power to keep them going The currenteconomic malaise will increase the presshysure on companies to become more eshycient More has to be done with less whichis cloud computingrsquos main promise

This special report will chronicle therise of the cloud and try to predict where itis heading It will start by looking at thetechnology Computing clouds are imshymensely complex but can be roughly dishyvided into three layers infrastructure apshyplications and the periphery where theymeet the real world These will be discussshyed in turn The report will go on to considerthe impact the cloud will have on the IT inshydustry and the economy as a whole Theconclusion will look at what might stopthe cloud from growing ever thicker regushy

lation and worries about the safety of bothpersonal and corporate data

Irving WladawskyshyBerger a technolshyogy visionary at IBM compares cloudcomputing to the Cambrian explosionsome 500m years ago when the rate ofevolution speeded up in part because thecell had been perfected and standardisedallowing evolution to build more complexorganisms Similarly argues Mr WladawshyskyshyBerger the IT industry spent much ofits rst few decades developing the basiccomponents of computing Now thatthese are essentially standardised biggerand more diverse systems can emergeFor computing to reach a higher level hesays its cells had to be commoditised 7

2A young cloud

Source Pew Internet amp

American Life Project

Survey based on 1553 internet usersdagger35 of internet users connecting

to Wi-Fi away from home or work

Cloud-computing activities by age cohortsApril-May 2008 of users

0 25 50 75 100

Web-mail services

Store personalphotos

Onlineapplications

Store personalvideos

Pay to storecomputerfiles online

Back up hard driveto an online site

Have done atleast one activity

Have done atleast two activities

All internet users(All laptop usersdagger)

56(64)

34(44)

29(38)

7(13)

5(10)

5(9)

69(79)

40(52)

Ages 18-29

30-49

50-64

65+

1Cumulonimbus

Source Google Trends

Cloud computing average weekly search volumesSeptember average 2007=100

S O N D

2007J F M A M J J A S

2008

0100

200

400

600

800

1000

The Economist October 25th 2008 A special report on corporate IT 3

1

IT IS almost as easy as plugging in a laserprinter Up to 2500 serversin essence

soupedshyup personal computersarecrammed into a 40shyfoot (13shymetre) shippingcontainer A truck places the container inshyside a bare steelshyandshyconcrete buildingWorkers quickly connect it to the electricgrid the computer network and a watersupply for cooling The necessary softwareis downloaded automatically Within fourdays all the servers are ready to dish upvideos send eshymails or crunch a rmrsquos cusshytomer data

This is Microsoftrsquos new data centre inNorthlake a suburb of Chicago one of theworldrsquos most modern biggest and most exshypensive covering 500000 square feet(46000 square metres) and costing$500m One day it will hold 400000 servshyers The entire rst oor will be lled with200 containers like this one Michael Mashynos the head of Microsoftrsquos data centres isreally excited about these containers Theysolve many of the problems that tend tocrop up when putting up huge data censhytres how to package and transport serverscheaply how to limit their appetite for enshyergy and how to install them only whenthey are needed to avoid leaving expenshysive assets idle

But containers are not the only innovashytion of which Mr Manos is proud Microshysoftrsquos data centres in Chicago and acrossthe world are equipped with software thattells him exactly how much power eachapplication consumes and how much carshybon it emits Wersquore building a global inforshymation utility he says

Engineers must have spoken with simishylar passion when the rst moving assemshybly lines were installed in car factories alshymost a century ago and Microsoftrsquos datacentre in Northlake just like Henry Fordrsquosrst large factory in Highland Park Michishygan may one day be seen as a symbol of anew industrial era

Before Ford revolutionised carmakingautomobiles were put together by teams ofhighly skilled craftsmen in customshybuiltworkshops Similarly most corporate datacentres today house armies of systemsadministrators the craftsmen of the inforshymation age There are an estimated 7000such data centres in America alone most

of them oneshyo designs that have grownover the years reecting the history ofboth technology and the particular use towhich it is being put It is no surprise thatthey are egregiously inecient On avershyage only 6 of server capacity is used acshycording to a study by McKinsey a consulshytancy and the Uptime Institute athinkshytank Nearly 30 are no longer in useat all but no one has bothered to removethem Often nobody knows which applishycation is running on which server A wideshyly used method to nd out is Letrsquos pull theplug and see who calls

Limited technology and misplaced inshycentives are to blame Windows the mostpervasive operating system used in datacentres allows only one application to runon any one server because otherwise itmight crash So IT departments just keptadding machines when new applicationswere needed leading to a conditionknown as server sprawl (see chart 3)This made sense at the time servers werecheap and evershyrising electricity bills weregenerally charged to a companyrsquos facilitiesbudget rather than to IT

To understand the technology neededto industrialise data centres it helps to lookat the history of electricity It was only afterthe widespread deployment of the rotaryconverter a device that transforms onekind of current into another that dierentpower plants and generators could be asshysembled into a universal grid Similarly atechnology called virtualisation now alshylows physically separate computer sysshytems to act as one

Virtually newThe origins of virtualisation go back to the1960s when IBM developed the technolshyogy so that its customers could make betteruse of their mainframes Yet it lingered inobscurity until VMware now one of theworldrsquos biggest software rms applied it tothe commodity computers in todayrsquos datacentres It did that by developing a smallprogram called hypervisor a sort of elecshytronic trac cop that controls access to acomputerrsquos processor and memory It alshylows servers to be split into several virtualmachines each of which can run its ownoperating system and application

In a way wersquore cleaning up Microsoftrsquossins says Paul Maritz VMwarersquos boss anda Microsoft veteran and in doing so wersquoreseparating the computing workload fromthe hardware Once computers have beshycome more or less disembodied all sortsof possibilities open up Virtual machinescan be red up in minutes They can bemoved around while running perhaps toconcentrate them on one server to save enshyergy They can have an identical twinwhich takes over should the original failAnd they can be sold prepackaged as virshytual appliances

VMware and its competitors whichnow include Microsoft hope eventually toturn a data centreor even several oftheminto a single pool of computingstorage and networking resources that canbe allocated as needed Such a realshytimeinfrastructure as Thomas Bittman ofGartner calls it is still years o But the necshyessary software is starting to become availshyable In September for instance VMwarelaunched a new virtual datashycentre opershyating system

Perhaps surprisingly it is Amazon a bigonline retailer that shows where things areheading In 2006 it started oering a comshyputing utility called Amazon Web Services(AWS) Anybody with a credit card canstart say a virtual machine on Amazonrsquosvast computer system to run an applicashytion such as a webshybased service Develshyopers can quickly add extra machines

Where the cloud meets the ground

Data centres are quickly evolving into service factories

3Voracious

Source IDC

Worldwide spending $bn on

FORECAST

0

50

100

150

200

250

0

10

20

30

40

50

1996 98 2000 02 04 06 08 11

New servers

Server management and administration

Power and cooling Serversinstalledbase m

4 A special report on corporate IT The Economist October 25th 2008

2 when needed and shut them down if thereis no demand (which is why the utility iscalled Elastic Computing Cloud or EC2)And the service is cheap a virtual machshyine for instance starts at 10 cents per hour

If Amazon has become a cloudshycomshyputing pioneer it is because it sees itself asa technology company As it branched outinto more and more retail categories it hadto develop a sophisticated computing platshyform which it is now oering as a servicefor a fee Of course this has nothing to dowith selling books says Adam Selipsky incharge of product management at AWSbut it has a lot to do with the same techshynology we are using to sell books

Yet Amazon is not the only big onlinecompany to oer the use of industrialshyscale data centres Google is said to be opshyerating a global network of about threedozen data centres loaded with more than2m servers (although it will not conrmthis) Microsoft is investing billions andadding up to 35000 servers a month Othshyer internet giants such as Yahoo are alsobusy building huge server farms

In some places this has led to a veritabledatashycentre construction boom Half a dozshyen are being built in Quincy a hamlet inthe middle of Americarsquos Washington stateclose to the Columbia River The attractionis that its dams produce plenty of lowshycostpower which apart from IT gear is themain input for these computing farms Onaverage cooling takes as much power ascomputing Microsoftrsquos new data centrenear Chicago for instance has three subshystations with a total capacity of 198MW asmuch as a small aluminium smelter

But cheap electricity is only one albeitimportant criterion for choosing the site ofa data centre Microsoft currently feeds 35sets of data into an electronic map of theworld including internet connectivity theavailability of IT workers even the airquality (dry air makes a good coolant) tosee where conditions are favourable andwhich places should be avoided Apparshyently Siberia comes out well

Google for its part seems to be thinkshying of moving oshore In August it apshyplied for a patent for watershybased data censhytres Computing centres are located on aship or ships anchored in a water bodyfrom which energy from natural motion ofthe water may be captured and turnedinto electricity andor pumping power forcooling pumps to carry heat away saysthe patent application

Many chief information ocers wouldlove to take their IT infrastructure out tosea and perhaps drown it there Even as deshy

mand for corporate computing continuesto increase IT budgets are being cut At thesame time many rmsrsquo existing IT infrashystructure is bursting at the seams Accordshying to IDC a marketshyresearch rm a quarshyter of corporate data centres in Americahave run out of space for more servers Forothers cooling has become a big constraintAnd often utilities cannot provide the extrapower needed for an expansion

Fewer bigger betterSo IDC thinks that many data centres willbe consolidated and given a big makeoverThe industry itself is taking the lead For exshyample HewlettshyPackard (HP) used to have85 data centres with 19000 IT workersworldwide but expects to cut this down tosix facilities in America with just 8000employees by the end of this year reducshying its IT budget from 4 to 2 of revenue

Other large organisations are followingsuit Using VMwarersquos software BT a teleshycoms rm has cut the number of servers in

its 57 data centres across the world from16000 to 10000 yet increased their workshyload The US Marine Corps is reducing thenumber of its IT sites from 175 to about 100Both organisations are also starting tobuild internal clouds so they can move apshyplications around Ever more rms are exshypected to start building similar inshyhouse orprivate clouds The current economicmalaise may speed up this trend as compashynies strive to become more ecient

But to what extent will companies outshysource their computing to public cloudssuch as Amazonrsquos James Staten of Forresshyter Research a marketshyresearch rm saysthe economics are compelling particularlyfor smaller rms Cloud providers he sayshave more expertise in running data censhytres and benet from a larger infrastrucshyture Yet many rms will not let companydata oat around in a public cloud wherethey could end up in the wrong hands Theconclusion of this report will consider thequestion of security in more detail

It does not help that Amazon and Gooshygle recently made headlines with serviceinterruptions Few cloud providers todayoer any assurances on things like conshytinuity of service or security (called sershyviceshylevel agreements or SLAs) or take onliability to back them up

As a result says Mr Staten cloud comshyputing has not yet moved much beyondthe earlyshyadopter phase meaning thatonly a few of the bigger companies are usshying it and then only for projects that do notcritically aect their business The Washshyington Post for instance used AmazonrsquosAWS to turn Hillary Clintonrsquos WhiteHouse schedule during her husbandrsquostime in oce with more than 17000 pagesinto a searchable database within 24hours NASDAQ uses it to power its serviceproviding historical stockmarket informashytion called Market Replay

Stefan van Overtveldt the man incharge of transforming BTrsquos IT infrastrucshyture thinks that to attract more customersservice providers will have to oer virtualprivate clouds fenced o within a publiccloud BT plans to oer these as a servicefor rms that quickly need extra capacity

So there will be not just one cloud but anumber of dierent sorts private ones andpublic ones which themselves will divideinto generalshypurpose and specialised onesCisco a leading maker of networking gearis already talking of an intercloud a fedshyeration of all kinds of clouds in the sameway that the internet is a network of netshyworks And all of those clouds will be fullof applications and services 7

The Economist October 25th 2008 A special report on corporate IT 5

1

WANT to become a programmer in 20minutes With the program from Iceshy

berg a startshyup you can Just open the getshyting started wizard and pick the type ofapplication say project managementType in its business objectsthings likeclient team and membersand tellthe tool how they relate to each otherThen design some input forms and denethe process for getting a project done Anshyother click and you are ready to go

In reality of course things are not thatsimple And many professional programshymers will sco at the development tool asa mere toy Yet Iceberg and similar outtsdemonstrate that geeks are losing their moshynopoly on programming Now with a bitof patience anybody can create a simpleapplication for instance to collaboratewith colleagues or to draw an online map

This democratisation of programminghowever is only a small part of somethingmuch deeper a fundamental change in thenature of software It is not just that moreand more software will become a servicedelivered online More importantly applishycations webshybased or not will no longercome as a big chunk of software but willbe made up of a combination of electronicservicesa shift that has picked up a lot ofspeed since computing began moving intothe cloud

To understand this new way of buildshying applications known as serviceshyorishyented architecture (SOA) think of a culishynary analogy Whereas the old chunk ofsoftware resembles a precooked meal thatjust has to be popped into the oven thenew architecture is more like a restaurantIt is a service in itself but also a combinashytion of subshyservices There is the waiter

who takes the order and conveys it to thekitchen There is the cook who preparesthe food And there are the cleaners whokeep the place tidy Together they create theapplication a restaurant

An attack of the vapoursThe importance of this shift from a monoshylithic product to services is hard to overshystate In a sense it has seeded the cloud alshylowing the dropletsthe services thatmake up the electronic vapourto form Itwill allow computing to expand in all dishyrections and serve ever more users Thenew architecture also helps the less technishycally minded to shape their own cloudsusing such tools as Icebergrsquos

Just as for the industrialisation of datacentres there is a historic precedent for thisshift in architecture the invention of movshyable type in the 15th century At the timeprinting itself was not a new idea But itwas Gutenberg and his collaborators whothought up the technologies needed tomake printing available on a mass scalecreating letters made of metal that could bequickly assembled and reshyused

Similarly the concept of modularityhas been around since the early days ofcomputing Everything in computer scishyence is to just write less code What is thetechnique for writing less code Itrsquos calledsubroutines said Bill Gates Microsoftrsquosfounder in a recent interview A subroushytine is a part of a program that can be reshyused just like movable type The idea saysMr Gates has always been to apply thisprinciple of a subroutine more broadly

Yet this did not happen mainly beshycause the cost of computing fell much fastshyer than that of communications Ever

cheaper and more powerful chips made itpossible to move from mainframes tominicomputers to personal computers(PCs) and now to handshyheld devices Butconnecting all these pieces remained dishycult and expensive which meant that suchdevices all had to come with their owndata and chunky programs Now thanks toplenty of cheap bandwidth and more andmore wireless connectivity computing isable to regroup into specialised services orMr Gatesrsquos subroutines We now live in aworld whereeth[a] subroutine can exist onanother computer across the internet

Part of Gutenbergrsquos genius was to recogshynise the need for all the letters to be identishycal in height so they could be easily comshybined Similarly for computing services towork there had to be robust technical stanshydards Only a few years ago this seemed farbeyond the IT industryrsquos reach Most rmsinsisted on their proprietary technologymostly to lock in their customers Againcheaper communications helped to bringabout change The success of the internetdemonstrated the huge benets of openstandards and forced vendors to agree oncommon ways for their wares to work toshygether One result is a stack of somethingcalled webshyservices standards

Serviceshyoriented architecture rstshowed up in openshysource software butwas quickly adopted by big enterpriseshysoftware vendors because they had apressing need for it says Jim Shepherd ofAMR Research a consultancy Big softwarevendors for instance had to nd a way tountangle the hairball of code that their proshyducts had become or else they themselveswould choke on it Customers wantedmore exible and extensible programs

Creating the cumulus

Software will be transformed into a combination of services

6 A special report on corporate IT The Economist October 25th 2008

2 Think back to the gastronomic examshyple A precooked meal is hard to changeand so are traditional software applicashytions By contrast a restaurant can easilychange its menu and its style of operationSimilarly SOAshybased software allowscompanies to alter their business processshyes such as the way they handle orders tocollect cash

SAP a German software rm was oneof the rst companies to put this serviceshyoriented architecture front and centreStarting in 2003 it developed among othshyer things a new corporateshysoftware packshyage that did away with monolithic applicashytions such as programs to keep track of acompanyrsquos nances or manage its relationshyship with customers Instead it introduceda collection of reshyusable components thatcould be strung together at will

IBM too is a fan of SOA and web sershyvices But its approach is somewhat diershyent given that it does not sell business apshyplications but makes most of its moneyfrom IT services and software to managethe underlying computing infrastructureIBM uses SOA mainly to help rms inteshygrate their increasingly complex and dispashyrate IT systems Its software turns theminto a collection of services that can bewoven into business processes

The approaches may be dierent butthe vision is the same to create IT systemsthat adapt to the business needs of compashynies and allow them to connect When Iwant to do something new explainsSteve Mills the boss of IBMrsquos softwaregroup I do not need to build a new applishycation but can use the pieces I alreadyhave To Peter Zencke who led the develshyopment of SAPrsquos new package its most exshyciting feature is that any of the processcomponents can now become a serviceprovided by some other rm

Despite millions of dollars spent onmarketing SOA it has not really taken oyet But many webshybased applications forconsumers rely on this concept The primeexample is Google Maps When the onlinegiant launched the service programmersquickly gured out how to mix the mapswith other sources of information This ishow for example Housingmapscom wascreated a combination of a Google mapwith the rental and sales listings fromCraigslist a website for classied ads Itwas one of the rst mashshyups as suchcombinations have come to be called

Since then the number of such mashshyups has exploded thanks mainly to sershyvices like Microsoftrsquos Popy and YahooPipes In essence these are graphical proshy

gramming tools Users drag and dropmodulesdata feeds providing such inshyformation as pictures headlines andsearch resultsand weave them together

Most of these mashshyups are still toysbut rms oering software as a servicehave started oering similar combinashytions In April Salesforcecom and Googleannounced that they would integrate theironline services Users of Salesforce whichhelps rms manage their customer relashytionships can now quickly switch to Gooshyglersquos webshybased applications

Smaller rms have already started toweave a network of services OpSource aSilicon Valley startshyup for instance proshyvides basic services for other SaaS rmsand web companies TriCipher anotherCalifornian newcomer authenticates usshyers of web applications Ribbit for its partallows these services to add voice commushynications to their oerings

Yet it is unlikely that the software cloudwill end up as a vast nebula of thousandsof specialised services Even creating a sershyviceshyoriented architecture is no silver bulshylet against complexity in a famous phraseby Frederick Brooks an elder of computerscience Although web services allow onshyline oerings to connect for instance it iscostly to synchronise their data And itwould not make sense for any rm to betits business on simple mashshyups

As software markets mature they tendto form two kinds of clumps integratedsuites of applications and platforms ontop of which others can build programsBoth forms are already emerging On theapplications side there is Google Apps and

Zoho which is even more comprehensiveIt encompasses a total of 18 applicationsincluding word processing project manshyagement and customershyrelationship manshyagement (CRM)

As for platforms there are already plenshyty in dierent shapes and sizes For entershyprise applications SAP has built one calledNetweaver Oracle oers something simishylar called Fusion Last year Salesforcelaunched a platform as a service allowshying other rms to use the plumbing thatsupports its own CRM oering

More recently platforms for consumerservices have been proliferating Faceshybook a social network was the rst to beshycome one in 2007 Other big online rmshave followed suit or will do so soon Gooshygle with App Engine Yahoo with YOSand Microsoft with a cloud operating sysshytem thought to be called Windows StrataSome predict a platform war to rival theepic ghts between Microsoftrsquos Windowsand Applersquos Macintosh

Never say dieWhat shape will the software cloud takeother than being a vast collection of sershyvices In one way it will look much like theold software world There will be a few bigplatforms akin to todayrsquos operating sysshytems and most applications will be writshyten to one of these platforms

What is less clear is just how much ofbusiness and consumer software will mishygrate into the cloud and how fast The anshyswer depends on whom you ask Unsurshyprisingly Marc Benio Salesforcersquosfounder and chief executive argues thatweb applications will spell the death ofsoftware But people are not about tothrow out their powerful PCs or other clishyent devices if only because many ofthem still work oine at times Similarlycompanies will always want to keep someapplications inshyhouse for reasons of secushyrity regulation or simply to maintain conshytrol Ray Ozzie Microsoftrsquos chief softwarearchitect promotes something calledsoftware plus services meaning thatcustomers will settle on the right mix ofold and new stu

If history is any guide Mr Ozzie is moreon the mark Even the biggest changes in IThave never spelt the death of anythingnotes Josh Greenbaum of Enterprise Apshyplications Consulting IBM for instance isstill making money with mainframes

So the software cloud just like its hardshyware underpinnings will be very diverseBut how will people make use of this kindof computing 7

4Looming ever larger

Source Gartner

Within the enterprise application

markets daggerEstimate

Worldwide software-as-a-service revenue $bn

2005 06 07dagger 08 09 10 110

2

4

6

8

10

12

200

159

90

259

957

Compound annual growthrate 2006-2011

291

Content communications and collaborations

Enterprise-resource planning

Supply-chain management

Customer-relationship management

Office suites and digital-content creation

Others

F O R E C A S T

The Economist October 25th 2008 A special report on corporate IT 7

1

IT WILL take something with a lot morebang to replace a medium that is thoushy

sands of years old That was the prevailingreaction when Amazon last November anshynounced the launch of Kindle an electronshyic book reader the size of a paperback thatcan store more than 200 volumes Yet bythe end of this year Amazon will have soldnearly 380000 Kindles says Mark Mahashyney an analyst with Citigroup a bankTurns out the Kindle is becoming the iPodof the book world he recently wrote in anote to clients in a reference to Applersquosiconic music player

It is certainly not the Kindlersquos looks thatexplain its success Compared with theiPod its design looks very last centurySoftware and battery life too leave a lot tobe desired The chief attraction of the deshyvice is the ease with which it can be used tobuy books and other content Equippedwith a mobileshyphone modem the Kindlecan simply pull new reading material outof the air Users do not even have to have awireless service contract Our vision is tohave every book that has ever been inprint available in less than 60 seconds exshyplains Je Bezos Amazonrsquos boss

It remains to be seen whether the Kinshydle will become a cultural phenomenonlike the iPod of which around 160m havebeen sold so far Amazon for its part isdownplaying the Kindlersquos success and willnot conrm any sales estimates But it issafe to say that once the next generation ofwireless networks is up and running hunshydreds of millions of devices will come likethe Kindle with builtshyin radio connectivity(see chart 5) Digital cameras will automatishycally upload pictures Smart meters willsend readings of how much electricity ahouse consumes All kinds of sensors willbe able to send messages even things likedipsticks when tanks of liquid are low

The relationship of these devices tocloud computing may not be obvious Butif huge data centres and applications makeup the cloud itself then all the hardwareand software through which it connectsand communicates with the real world areits periphery In IT speak this is known asthe front end or client side

As the Kindle and other examplesshow this layer does not have much to do

with the user interface or client device ofold It will do a lot of computing itself Itwill come in all shapes and sizes dependshying on what the user wants to do And itwill not just distribute information as theweb does but collect it as well The analoshygy that springs to mind here is a theatreperformance with audience participationthe electronic cloud will adapt to whateverit engulfs

As you like itJust like computing itself the dominantuser interface has evolved continually Inthe days of the mainframe when computshyers and their peripherals lled entirerooms people communicated with thesemachines rst via punch cards and thenvia greenshyglowing monitors which weresimply dumb terminals Only with the riseof personal computers did the user intershyface become more intelligent responsiveand graphical

The rst version of the web was thus abrief step backward To be sure browsersbrought colour and graphics to the hithershyto textshybased internet but they were asdumb as the mainframe terminal This haschanged only in recent years A bundle ofwebshydevelopment techniques dubbedAJAX and multimedia software such asAdobersquos Flash and Microsoftrsquos Silverlightnow allow programmers to write what arecalled rich internet applications (RIA)

Whatever the buzzword the principleis much the same Servers no longer dishup simple hypertext markup language(HTML) the webrsquos early lingua franca Inshycreasingly web pages are bona de piecesof software that are executed in the browsshyer Users of Web 20 sites who venture intomenu items such as view source in theirbrowsers can sometimes see thousands oflines of code

In recent months the browser has beshycome even more of a platform for otherprograms akin to an operating systemsuch as Windows The main driver of thistrend is Google with its huge strength indistribution that can only gain from moreand more software being oered as a sershyvice In May 2007 the Silicon Valley rmlaunched Gears a program that allowsweb applications to be used oine and inSeptember this year it released a newbrowser called Chrome Its most imporshytant feature is that it can execute several soshyphisticated web applications at once

Although for now the internet browserwill remain the main vehicle for people tointeract with the cloud other forms arecoming to the fore One is the widget asnippet of code that often lives on a PCrsquosdesktop and allows the user to get a quickpersonalised view of a set of data The ideais that a salesperson for instance shouldnot have to re up an entire application forcustomershyrelationship management tond out which leads to follow up

More importantly there is now a greatshyer variety of hardware through which toaccess the cloud Already desktop and lapshytop computers are starting to lose their moshynopoly for surng the web as smaller deshyvices such as smart mobile phones andvarious forms of portable computers startto compete with them

Asus a Taiwanese computershymakerstarted the trend when it launched a smallcheap laptop called Eee a year ago Nowthere are dozens of these devices Gartnerreckons that 52m of these minishynoteshybooks will be sold this year 8m next andas many as 50m in 2012

Perhaps the best indicator of things tocome is Intel a huge chipmaker It made afortune selling processors for servers pershysonal computers and laptops In June the

On the periphery

The cloudrsquos communications with its clients will become ever more intelligent and interactive

5Chatterboxes

Source iSuppli

Worldwide shipments of electronic productswith built-in wireless capability bn

2003 04 05 06 07 08 09 10 11 120

05

10

15

20

25

30

Local-area

Products with embedded wireless networking

Wide-areaTotal cellularhandsets

F O R E C A S T

8 A special report on corporate IT The Economist October 25th 2008

2 rm launched a new line of chips calledAtom designed to power what it calls netshybooks and mobile internet devices(MIDs) mainly intended for surng theweb Intel is also the driving force behindWiMAX a technology for wireless broadshyband access to the internet It wants to puta WiMAX radio chip into as many devicesas possible from portable computers tospecialised gadgets such as the Kindle

Applersquos iPhone and its App Storewhich allows iPhone and iPod owners todownload applications also provide aforetaste of how important wireless deshyvices will be for the cloud Apple launchedApp Store only in July Two months later ithad already tallied 100m downloadsmeaning that it took o much faster thanApplersquos highly successful iTunes musicstore Many of the programs on oer conshynect to the cloud including news feedsmultishyplayer games and a service thatkeeps track of the latest polls for Americarsquospresidential election

You can take it with youThe plethora of devices wirelessly conshynected to the internet will speed up a shiftthat is already under way from a deviceshycentric to an informationshycentric worldin the words of VMwarersquos Paul Maritz Upin the cloud there will be a body of data foreach individual that will accompany themthrough life he explains and it will not betied to any particular device as it is today

Again what will make this possible is

virtualisationthis time of client devicesnot servers With the help of software fromVMware and others some rms have alshyready virtualised their employeesrsquo desktopcomputers which allows them to be manshyaged centrally Operating systems and apshyplications will no longer run only on theemployeersquos PC but on a virtual machine ina data centre that can be accessed remotelytheoretically from any PC in the worldSooner or later mobile devices will also beshycome virtualised Users will be able to usetheir applications and data on whichevergadget they have at hand

Yet the cloudrsquos interface is designed notmerely to provide information but to gathshyer it as well The future belongs to servicesthat respond in real time to informationprovided either by their users or by nonshyhuman sensors predicts Tim OrsquoReilly thefounder of OrsquoReilly Media a publisher oftechnology books who coined the termWeb 20 Such live applications hesays will get better the more data they areable to collectand there will be plenty asthe cloud expands

One of the rst examples of such a sershyvice was Google What originally put thesearch service ahead of the competitionwhen it was launched a decade ago was itsway of harvesting the information providshyed by web users in linking to other sitesthe more links point to a page the moreuseful it must be These days most links aregenerated by computers so the originalform of this page rank algorithm has

long since been scrapped But Googlersquos apshyproach is still the same mining informashytion provided by web users such as theirsearch histories to provide more relevantsearch results and more eective and tarshygeted advertising

The direct link to users also allows rmssuch as Google continuously to improvetheir interface something traditional softshywareshymakers were not able to do At anygiven time Google is running dozens oftests to optimise the look and feel of its ofshyferings This makes web applications farless technologyshydriven and much moreusershyoriented says IBMrsquos Mr WladawskyshyBerger They are much more inspired bywhat goes on in the real world

A raft of startshyups is also trying to builda business by observing its users in eectturning them into human sensors One isWesabe (in which Mr OrsquoReilly has investshyed) At rst sight it looks much like any pershysonalshynance site that allows users to seetheir bank account and creditshycard inforshymation in one place But behind the scenesthe service is also sifting through its memshybersrsquo anonymised data to nd patterns andto oer recommendations for future transshyactions based for instance on how much aparticular customer regularly spends in asupermarket Wireless devices too will inshycreasingly become sensors that feed intothe cloud and adapt to new information

Nokia for its part is planning to buildall kinds of sensors into mobile phones tomonitor things like movement barometricpressure or even the ownerrsquos healthwhich many experts expect to become abig new trend Sensors could also be usedto record peoplersquos activities creating whatsome already term a lifelograising allkinds of privacy concerns

As wireless technology gets better andcheaper more and more dierent kinds ofobjects will connect directly to the cloudSAP the German softwareshymaker haslaunched a research project called The Inshyternet of Things to see what can be donewith the resulting information As part ofthat project an initiative called the FutureFactory is now under way to investigatehow intelligent tags can make manufacturshying more adaptive and ecient

More and more data get you only so farhowever In the end Googlersquos search reshysults and its textshybased online advertiseshyments are relevant to users only becausethe rm has devised clever ways to siftthrough them says Hal Varian the rmrsquoschief economist The big challenge of thecloud will be to connect the myriad data init and make them protable 7

The Economist October 25th 2008 A special report on corporate IT 9

1

EVEN elephants can die In 1993 extincshytion came close for IBM then the

worldrsquos largest computershymaker (it hassince been overtaken by HP) Its mainshyframe business was collapsing and protswere plummeting At that point LouisGerstner took over as chief executive andmanaged to turn the company aroundOnly a handful of people understandhow precariously close IBM came to runshyning out of cash in 1993 he writes in hismemoir Who Says Elephants CanrsquotDance Whether we would have had tole for bankruptcy I canrsquot say

There are many reasons why IBM nearshyly went bellyshyup not least the fact that BigBlue had become a bureaucratic monsterBut most critically it had failed to adapt tothe industryrsquos rst big platform shiftwhich only really made itself felt in the earshyly 1990s the move from mainframes tosmaller machines rst soshycalled minicomshyputers then personal computers IBMwas slow very slow in delivering distrishybuted computing and many small compashynies moved in to ll the gap Mr Gerstnerwrites

It is unlikely that the move into thecloud will produce a similar nearshydeath exshyperience or even a real casualtyif only beshycause IBM still stands as a warning Butthat does not mean that the structure of theIT industry will remain unchanged northat the economics will stay the sameOnce the IT sky really clouds over individshy

ual rmsrsquo share of the global IT budget (seechart 6) will shift

The move to distributed computingwhich started in the midshy1980s led to a bigchange in the IT industry In the era of themainframe computing came in a verticallyintegrated package mainly from IBM Withdistributed computing the industry beshycame a stack of horizontal layers In corshyporate IT these were mainly hardware thenetwork infrastructure software (such asoperating systems and databases) entershyprise applications and IT services

Not all of these layers were createdequal Computershymakers commanded athicker one for instance but software comshypanies were more protable The key proshygram was the operating system both onservers and on personal computers (clishyents) It was the standard to which othercomponents of IT systems had to conformUsually this was a version of Windowswhich made Microsoft the IBM of this newera of computing

Cloud computing is unlikely to bringabout quite such a dramatic shift In esshysence what it does is take the idea of distrishybuted computing a step farther Still it willadd a couple of layers to the IT stack One ismade up of the cloud providers such asAmazon and Google The other is softwarethat helps rms to turn their IT infrastrucshyture into their own cloud known as a virshytual operating system for data centres

Drawing a neat diagram of the IT stack

will also become increasingly dicult beshycause the layers are becoming less distinctIn a world of services it often does notmake sense to think of hardware and softshyware separately argues Padmasree Warshyrior the chief technology ocer of CiscoBoth need to be blended to oer new sershyvices she says

Mix and matchEven though the IT stack may not changeall that much the perceived value of thedierent layers will shift and with it theamount of prot IT rms can make fromeach of them Who will lose and who willwin depends on how much of computing

Highs and lows

As IT gets cloudier the economics of the business will change

6Follow the money

Source Gartner Forecast

Worldwide end-user spending $trn

2006 07 08 090

1

2

3

4

Computer hardware

Software

IT services

Telecomsequipment

Telecoms services

10 A special report on corporate IT The Economist October 25th 2008

2

1

eventually moves into the cloud In the rst round almost everybody in

the IT industry will do well as the cloudsare being built The biggest winners arelikely to be hardwareshymakers says MarkStahlman of Gartner Hardware alwayswins when new demand for computing isuncovered And we havenrsquot had such asweeping global demand since the 1990s

But in the longer term there will be relashytive winners and losers The hardwarebusiness could actually nd itself in thelosing group Its margins could getsqueezed as cloud computing matures beshycause there will be fewer customers withmore buying power says James Staten ofForrester Research Large cloud providerscan dictate how to build servers and atwhat price he notes

All that may explain why hardwareshymakers were among the rst to jump onthe cloudshycomputing bandwagon So farthey have done only what Mr Staten callscloudshywashing relabelling existing proshyducts that help customers build a moreexible IT infrastructure But they are alsopreparing for a time when more moneycan be made building clouds than buildingcomputers IBM and HP for instance haveteamed up with other rms and universishyties to design new cloud architectures

Which side of the fenceIn the long run says Mr Staten hardwareshymakers may be torn between supplyingcloud providers or becoming providersthemselves Being both will not be easybecause the rms would be competingwith their biggest customers Dell seems tohave decided to be a cloud supplier SunMicrosystems is a candidate to become aprovider it is oering a cloudshylike servicecalled Networkcom albeit not very sucshycessfully HP and IBM already used to thebalancing act of selling hardware and proshyviding IT services will try to do both

Makers of traditional software will ndthe going even tougher With the advent ofopenshysource software in particular Linuxselling operating systems had already beshycome less protable In a virtual worldthey will become even more commodishytised which is bad news for MicrosoftMany business applications no longerneed a big generalshypurpose server operatshying system but can use a specialised onewhich should put pressure on prices Onclient computers more and more applicashytions are written to run in browsers not onany particular operating system

Makers of business applications arealso on the defensive Traditionally they

have made billions by selling their proshygrams often demanding hefty sums to inshystall them and then charging an annualmaintenance fee for upgrades and technishycal support But this highly lucrative busishyness model has come under increasingpressure says Michael Cusumano a proshyfessor at the Massachusetts Institute ofTechnology (MIT)

For one he says software vendors willhave to nd new ways to charge for theirwares in the cloud tying licensing fees tothe number of users for instance will bedicult since services will mostly be conshysumed by other machines More imporshytantly the corporate world has becomeless and less willing to buy software forlarge sums of money so software rms listshyed on Americarsquos stockmarkets now makemost of their prots from maintenanceand other services (see chart 7) SAP will inshycrease its annual maintenance fees to atleast 22 of a programrsquos value over thenext few years in line with those of Oracleits main rival

Yet the biggest challenge for softwarerms is to become providers of online sershyvices themselves says Brent Thill of Citi Inshyvestment Research So far they havemoved slowly oering SaaS only on theside if at all This was partly because theircustomers were not that keen But moreimportantly notes Mr Thill the softwarehouses are still wedded to their old busishyness model With SaaS they do not get a bigupfront payment only subscription fees

Once Salesforce and NetSuite hadshown that the SaaS model works the inshycumbents began to move faster In Septemshyber last year for instance SAP presentedBusiness ByDesign a package of webshybased enterprise applications for smallerbusinesses But success will not come easishyly SAP has slowed down the introductionof the new service because it still needs towork out how to run it cheaply enough tomake a reasonable prot

Pure SaaS providers also have a lot ontheir minds Some experts such as JoshuaGreenbaum of Enterprise ApplicationsConsulting reckon that few will ever be asprotable as traditional software rms Alshythough it is almost a decade old Salesforcestarted making money only in 2006 mainshyly because it rst had to spend heavily onmarketing to attract customers But nowthat the service has 1m users and revenuesof more than $1 billion these costs willcome down says the rm

The companies that have the bestchance of making money from the cloudare those that get things to connect and

work together and help customers movetheir computing around This is music tothe ears of big IT rms not least IBM Nearshyly 80 of its revenues come from infrashystructure software and IT services which itcan oer globally HP is catching up havingtaken over EDS another big ITshyservicesrm Both Microsoft and SAP for their partbelieve that rms will want to have achoice in where to do their computing aswell as the exibility to move thingsaround over time

Two potentially important contestantsare rarely mentioned Cisco and EMC theleading makers of networking and storagegear respectively Having invested a lot insoftware and services Cisco has becomemore than just the source of most of theworldrsquos routers the trac cops of the intershynet It is betting that in the cloud the netshywork layer will become more importantfor instance to ensure that computingworkloads are able to move around seshycurely EMC for its part has made two dozshyen cloudshyrelated investments andlaunched a cloudshyinfrastructure division

Whoever manages to own the domishynant operating system for the data centrecould become a big winner VMware isbound to have a shot at this As well as beshying the market leader in virtualisation ithas the support of EMC which holds 86of the rm But the competition is likely tobe intense

Will this prospective platform war proshyduce a dominant company in the mould ofIBM or Microsoft that is able to extractmore than its fair share of the prots Probshyably not because it will be relatively easyto switch between vendors says GeorgeGilbert of Tech Strategy Partners a consulshytancy Nor is it likely that one rm willmanage to build a global cloud monopolyAlthough there are important economiesof scale in building a network of data censhy

7Serving up a treat

Source Michael Cusumano

Massachusetts Institute of Technology

US-listed software-firmsrsquo sales of total

1990 92 94 96 98 02 042000 06

03

04

05

06

07

Services

Products

The Economist October 25th 2008 A special report on corporate IT 11

2

1

BUSINESSES as well as most organishysations outside the business world

begin to shift from hierarchical processesto networked ones Nearly every facet ofhuman activity is transformed in someway by the emergent fabric of interconnecshytion This reorganisation leads to dramaticimprovements in eciency and producshytivity So said Wired magazine the centralorgan of Web 10 in July 1997 in an essay enshytitled The Long Boom arguing that theworld was in for 25 years of prosperityfreedom and a better environment Backthen the article reected the general optishy

mism that led up to the internet bubbleNow after two busts several wars andgrowing fears of global warming it makesfor somewhat surreal reading

The cloud lends itself to similar hypershybole Yet so far there has not been much deshybate about its economic falloutprobablybecause the new economy ended badlyand the newest one is currently doing evenworse There will be many ways in whichthe cloud will change businesses and theeconomy most of them hard to predict butone theme is already emerging Businessesare becoming more like the technology itshy

self more adaptable more interwovenand more specialised These developshyments may not be new but cloud computshying will speed them up

Corporate IT has always promised tomake companies more agile In the 1990smany companies reshyengineered their busishyness processes when they started using aform of software called enterpriseshyreshysource planning (ERP) which does thingssuch as managing a rmrsquos nances andemployees But once these massive softshyware packages were in place it was exceedshyingly dicult to change them Implementshy

The long nimbus

The cloud will make businesses more adaptable interconnected and specialisedand often smaller

tres the computing needs of companiesand consumers vary too widely for onesize to t all

Even if the cloud is likely to transformthe IT industry some things will stay thesame One is the importance of lockshyin Ifanything companies and developers willbe even more dependent on cloud platshyforms and applications than they are onthe old kind SaaS promotes the hollowshying out of IT a rm that needs to migrateto another system will no longer have therequired expertise When Facebook saymakes a change to its platform developershave no choice but to go along with itSome are already calling for a CloudComputing Consortium in the mould ofthe World Wide Web Consortium (W3C)to set standards that allow applications tomigrate easily from one platform to anothshyer One standard initiative called OpenshySocial already allows the same webshybased application to run in several socialnetworks which are also clouds of sorts

But standards go only so far Some fearthat one company could try to monopoliseother key parts of the cloud ironically Mishycrosoft worries that Google is doing exactshyly that with the online advertising marketTo Steve Ballmer Microsoftrsquos boss Gooshyglersquos advertising platform is like a ywheelthat picks up speed as more websites atshytract more advertisers and vice versa

Eric Schmidt Googlersquos chief executivedenies any evil intent to achieve worlddomination He argues with some justicethat it would be hard for Google to controlthe cloud if only for technical reasonsmuch of it is already based on open stanshy

dards and its loose structure does not lenditself to locking customers in

Mr Schmidt promises that Google willnot lock its users in either Our competishytive advantage is not from lockshyin he saysbut from having specialised knowledgeof how to build data centres and how tobuild new software that is not reproducshyible such as our search algorithm This ishow we make our money

Yet Google is more like Microsoft than itlikes to admit says Nicholas Carr a techshynology writer and blogger Microsoft heargues achieved its dominant position inthe PC world not least by commoditising

products such as the browser that arecomplementary to its cash cows such asWindows as their cost came down deshymand for Microsoftrsquos products went up

Similarly Googlersquos natural instinct is todo its utmost to encourage people to spendmore time online because that will givethe company more opportunities to selladvertisements and collect data aboutthem According to Mr Carr almost everyshything the company doesbuilding hugedata centres ghting copyright restrictionsdigitising the worldrsquos libraries developinga new browser and most recently evenhelping to launch satellitesis aimed at inshycreasing the use of the internet Googlewants information to be free he recentlywrote in his blog because as the cost of inshyformation falls it makes more money

But Google may never become as powshyerful as Microsoft because regulators areunlikely to let it Microsoft was eventuallyput in the dock for abusing its monopolybecause it got too greedy pushing most ofthe rest of the industry to complain Giventhat the world has already lived throughthe Microsoft drama and that Google willaect many more industries the searchcompany is likely to be restrained muchearlier The rm is currently in negotiationswith the US Justice Department about acontroversial advertising partnership beshytween itself and one of its competitors Yashyhoo which would further strengthenGooglersquos position in online advertising

Even if the economics of the cloud arestill in ux though it is already clear that itwill have farshyreaching implications forbusinesses and for society as a whole 7

12 A special report on corporate IT The Economist October 25th 2008

2

1

ing SAP the market leader in ERP is likepouring concrete into your company goesan old joke among IT types

This helps to explain why in manyrms IT departments and business unitshave traditionally been at loggerheads Inrecent years tensions have worsenedCompanies must grapple with evershychangshying markets and regulations yet IT budgetsare being cut Many rms now have a hugebacklog of IT projects

Hence the interest in cloud computingIt turns capital expenditure into operationshyal expenditure which makes things mucheasier and cheaper Instead of having toshell out a lot of money for say a server totest an application and even with luckwait a few weeks for it to be up and runshyning managers just have to whip out acredit card open an account at AmazonWeb Services (AWS) and re up a virtualmachine for a few dollars

In many rms senior managers probashybly do not even know that business unitsare using AWS or similar services In someorganisations however it has already beshycome a muchshyappreciated RampD tool Pharshymaceutical companies for instance areregularly tapping into AWS to calculatesimulations Sogeti a European consultanshycy has used a cloud built by IBM to allow itto test new ideas and quickly put togetheran IT system for a companyshywide brainshystorming event

Cloud services have also been hugelysuccessful with startshyups which can nowenjoy infrastructure of the same quality aslarge companies In fact AWS is probablythe main reason why there are now somany rms oering all kinds of Web 20services Their usefulness may sometimesbe hard to gauge but that is a good thing Itis a sign of lively combinatorial innovashytion made possible because entrepreshyneurs can cheaply try new combinationsof technology says Googlersquos Mr Varian

Many startshyups would probably noteven exist without the cloud Take Anishymoto a service that lets users turn photosinto artsy music videos using articial inshytelligence When it launched on Facebooka social network demand was such that ithad to increase the number of its virtualmachines on AWS from 50 to 3500 withinthree days You could give me unlimitedfunding says Adam Selipsky of AWSand I wouldnrsquot know how to deploy thatmany servers in 72 hours

Combinatorial innovation should alsobe made easier by the fact that the cloudwill be a huge collection of electronic sershyvices based on standards But this serviceshy

oriented architecture will be even moreimportant for existing rms because itshould free their inner workingstheirbusiness processesfrom the straitjacketof their ERP systems and allow these proshycesses to be more easily adapted for inshystance to launch a new product

Again the software industry has beenpromising this for some years under thebanner of serviceshyoriented architecturediscussed in an earlier chapter Yet theadoption of SOA has been slow and manyprojects have failed says Chris Howard ofthe Burton Group a consultancy The reashysons are not just technical but cultural forexample some business units are not usedto sharing data Cloud computing will helpresolve some of these problems Manywebshybased services are built to be integratshyed into existing business processes

Donrsquot do it yourselfWhat eect will all this have on the natureof the rm If IT systems really allow comshypanies to become more modular and exshyible this should foster further specialisashytion It will become even easier tooutsource business processes or at leastthose parts of them where rms do not enshyjoy a competitive advantage Companieswill increasingly focus on their core andshed the context in the words of Geofshyfrey Moore managing director of TCG Adshy

visors a consultancyThis also means that companies will

rely more on services provided by othersThey will increasingly form process netshyworks a term for loosely connectedgroupings of specialised rms coined byJohn Hagel a business strategist at Deloitteamp Touche an auditing rm His prime exshyample is Li amp Fung a company based inHong Kong that has assembled a globalprocess network of nearly 10000 businesspartners in the clothing industry fromwhich it puts together customised supplychains for clothes designers

Both trends could mean that in futurehuge cloudswhich might be called inshydustry operating systemswill providebasic services for a particular sector for inshystance nance or logistics On top of thesesystems will sit many specialised and inshyterconnected rms just like applicationson a computing platform Yet this is onlyhalf the story The cloud changes not onlythe plumbing and structure of rms andindustries known as the transactionallayer but also their interactional layera term coined by Andy Mulholland chieftechnologist of Capgemini a consultancyHe denes this as the environment whereall the interactions between people takeplace both within an organisation andwith its business partners

Despite all the technology that has enshy

The Economist October 25th 2008 A special report on corporate IT 13

2

1

READERS may be excused if they havenever heard of Kinakuta It is a tiny isshy

land dreamed up by Neal Stephenson inhis novel Cryptonomicon In the scishyenceshyction classic libertarian technoloshygists and entrepreneurs try to turn it into adata haven for such things as anonymousonline banking and electronic money

Reality has indeed caught up with fanshytasy Iceland is about to become a Kinakuta

of sorts Data Islandia a local company istrying to establish the island as a vault for agrowing pile of data that rms must retainin order to comply with all kinds of regulashytions It has a compelling pitch With itscool climate abundant geothermal energyand secure remoteness Iceland appears tobe a prime location for data archives

As often however truth is strangerthan ction In a way Data Islandia is erectshy

ing borders in the cloud it intends to storeEuropean data according to European regshyulation and American bits according toAmerican rules What is more to keep thedata safe during transport they are pickedup with a data scooter (in essence a conshytainer lled with disk drives) and taken toIceland by aeroplaneas though breshyopshytic links had never been invented

This illustrates the political tensions

Computers without borders

The cloud may be the ultimate form of globalisation

tered the workplace in recent years so farthis layer has not really changed PCs cershytainly made people more productive butmost of their programs were not designedfor collaboration The enterprise applicashytions they worked with were still centralshyised systems And eshymail has in some waysmade things worse as the ood of messhysages takes up lots of time and attention

The dominant model is still that peoplerst labour individually and then mergetheir respective eorts says Mr Mulholshyland Itrsquos not much dierent from the ageof paper he writes in his book Mesh Colshylaboration Collaboration often meanspulling up your chair next to your colshyleague so you can look at the same screen

Consumers have pulled ahead of comshypanies in using cloudshybased services thatallow for better collaboration such asblogs wikis and social networks The rstgeneration of people that has grown up usshying all these tools is now entering theworkforce Being used to a culture of sharshying information freely these digital nashytives will be impatient with the rules oftraditional corporate IT

So it is helpful that rms have at last beshygun to embrace Web 20 technologies inearnest a trend predictably called Entershyprise 20 By 2013 companies around theglobe will spend $46 billion on such toolsaccording to Forrester Research What noshybody knows is how rms will trade o theadvantages of letting employees collaboshyrate with the outside world against the asshysociated risks for instance that condenshytial information is leaked Because of suchsecurity concerns (see chart 8) many rmsblock access to such sites as Facebook oncompany computers

Companies may not have much choicebut to open up says Mr Mulholland Emshy

ployees will increasingly resist constraintson their use of technology and they willhave a growing need to reach beyond thecorporate rewall Twenty years ago he arshygues 80 of the knowledge that workersrequired to do their jobs resided withintheir company Now it is only 20 becausethe world is changing ever faster We needto be open to new and unknown connecshytions with people and content he says

Exploiting the mesh in the words ofMr Mulholland will also mean that emshyployees may build simple applications oftheir own that allow them quickly to autoshymate repeat tasks using internal and extershynal IT services A new product by SerenaSoftware called Mashup Composer gives aforetaste of things to come Using a visualinterface even the not so technically mindshyed can quickly put together a service todeal say with travel requests or approvedocuments

Yet the impact of the cloud will also befelt on a macroeconomic level Just as itmakes small rms more competitive itwill help developing economies to move

ahead The biggest promise is that it willmake computing cheaper and easier touseand thus allow it to penetrate newmarkets says Russ Daniels chief technolshyogy ocer for HPrsquos cloudshyservices strategy

Hop skip and jumpThe mobile phone has already enabled deshyveloping countries to skip xedshyline netshyworks Cloud computing could prove to bea similar leapfrog technology because itdispenses with the need to build a cumbershysome IT infrastructure Software developshyers from a developing country can buildjust as great an application on our platformas somebody who lives in Palo Alto saysMr Benio of Salesforce

Indeed countries such as India will cershytainly take a big chunk of the global marketfor cloud services Zoho a popular suite ofwebshybased applications is operated by anIndian company AdventNet Indian hospishytals are already oering specialised healthshycare services this way The insurance armof ICICI an Indian bank has used thetechnology to come up with innovativeservices such as a personalised insurancefor diabetes Premiums are adjusted deshypending on how well policyholders stickto a tness plan All this suggests that theeconomic impact of the cloud may be feltnot only in the IT industry itself but in othshyer sectors too The internet disrupted themusic business Google disrupted the meshydia cloudshybased companies could becomedisrupters in other inecient industriesBuzzwords such as Health Care 20Banking 20 or even Education 20could soon acquire real meaning

But given that the cloud is global by nashyture how might it be regulated The conshyclusion of this special report will oersome answers 7

8Dangers within

Source Forrester

Research

How IT organisations feel about risk ofemployee-driven unsanctioned use of Web 20June 2008

Survey of 242 US IT decision-makers

at companies with 500+ employees

0 10 20 30 40 50

Very concerned

Somewhat concerned

Somewhat unconcerned

Completely unconcerned

14 A special report on corporate IT The Economist October 25th 2008

2

Previous special reports and a list offorthcoming ones can be found online

wwweconomistcomspecialreports

Future special reportsCountries and regionsSpain November 8thRussia November 29thIndia December 13th

Business nance economics and ideasCars in the developing world November 15th The sea January 3rd 2009The future of nance Jan 31st 2009

wwweconomistcomrights

Oer to readersReprints of this special report are available at aprice of pound350 plus postage and packing A minimum order of ve copies is required

Corporate oerCustomisation options on corporate orders of 100or more are available Please contact us to discussyour requirements

Send all orders to

The Rights and Syndication Department26 Red Lion SquareLondon WC1R 4HQ

Tel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492eshymail rightseconomistcom

For more information and to order special reportsand reprints online please visit our website

that will arise with the cloud In one way itis the ultimate form of globalisation vastvirtualised computer systems and elecshytronic services know no borders Yet govshyernments are likely to go to great lengths toavoid losing even more control

When the internet went mainstream inthe late 1990s libertarian thinkers arguedthat cyberspace was a distinct place callingfor laws and legal institutions of its ownAfter all they said it was built in such away that it interprets censorship as damshyage and routes around it But many govshyernments quickly found ways to blockcontent they deemed oensive Just look atChina and its great rewall

Controlling where data are stored andhow they are treated is harder though beshycause information can oat freely in thecloud And it is not just undemocratic govshyernments that want to control their citishyzensrsquo and companiesrsquo data indeed thereare nearly as many sets of data regulationas there are countries If we wanted to beon the safe side in terms of regulation weprobably would need 95 individual datacentres says Chuck Hollis a technologistat EMC the leading maker of storage gearwhich owns Mozy a cloud service that alshylows users to back up their data

There are technological xes to this proshyblem too Customers of Amazonrsquos storageservice for instance can have their datakept either in an American or a Europeandata centre In future cloud providers willoer many more options for where dataare kept and how they are protected Itseems possible that data as well as content

will eventually travel with security locashytion and expiry policies attached

It is when computers become virtualmachines that things get really trickyThese days IT systems are at the core ofmany companiesand just like data thesesystems can now live in a variety of placesWhat happens if they start to migrate toanother country where power is cheaperor regulation laxer Similarly if servicesare a combination of elements provided indierent jurisdictions who is liable ifsomething goes wrong

The cloudrsquos potential political and soshycial eect is only now entering the publicdebate IT rms are putting it on the agendaon both sides of the Atlantic In midshySepshytember for instance Google organised adiscussion on the subject in WashingtonDC A few days later SAP presented a whitepaper in Brussels pointing out that policyshymakers are not aware of the dramatic ecoshynomic impact of the Future Internet asthe paper calls the cloud

IT industry leaders note that ocialsfrom many countries have begun to takean interest in the cloud Some just wantdata centres to be built in their country tocreate jobs others are concerned about isshysues of law enforcement and jurisdictionThe danger they say is that cloud providshyers might be obliged to build more datacentres than are needed and have to comshyply with many dierent regulatory reshygimes Some of them have been oatingthe idea of freeshytrade zones for data censhytres where common rules would apply

Yet such ideas appear at odds with anshyother big question that could keep thecloud from growing how to protect prishyvacy Consumers expect their informashy

tion will be treated the same way on thecloud as if it were stored at home on theirown computers says Ari Schwartz of theCenter for Democracy and Technology anadvocacy group Many of the devices thatfeed into it such as sensors and cameraswill be intrusive For example Googlersquosvans go round taking streetshybyshystreet picshytures of cities for the companyrsquos onlinemap service called Streetview The picshytures are meant to help people nd theirway around but also often show passshyersshyby in embarrassing situations To proshytect their identity Google now blurs theirfaces and licence plates

Hands o my dataBut it is not only personal information thatcould get out into the open Privacy is aworry for companies tooand not just beshycause criminals or spies might intercepttheir data Once they are in the cloud govshyernments can also get their hands on themmore easily SWIFT the organisation thatmanages international bank transfers isplanning to build a data centre in neutralSwitzerland That will allow it to keep dataabout European transfers on the old contishynent where it cannot be subpoenaed bythe American government Webshybased eshymail is not safe either Thanks to the StoredCommunications Act American law enshyforcers can read peoplersquos messagesanddo not even have to tell the recipient

Just as too much regulation may keepthe cloud from rising high so could lack ofprivacy If consumers and companies canshynot be sure that their information is safethey will err on the side of caution But deshyspite all the caveats the precipitation fromthe cloud will be huge 7

2 A special report on corporate IT The Economist October 25th 2008

2 puting The term entered into ITshyspeakonly a year ago and has spread vorashyciously Cloud conferences and cloud blogsare multiplying almost as quickly as cloudstartshyups Established IT rms are slappingthe new label on old gear

In fact the cloud craze may havepeaked already if the number of Googlesearches is any guide (see chart 1) Cloudcomputing is bound to go through atrough of disillusionment as Gartner aresearch rm calls the phase in the hypecycle when technologies fail to meet exshypectations and quickly cease to be fashionshyable Much still needs to be invented forthe computing sky to become truly cloudy

Yet even if the term is already passeacute thecloud itself is here to stay and to grow It folshylows naturally from the combination ofever cheaper and more powerful processhysors with ever faster and more ubiquitousnetworks As a result data centres are beshycoming factories for computing serviceson an industrial scale software is increasshyingly being delivered as an online serviceand wireless networks connect more andmore devices to such oerings

All this allows computing to be disagshygregated into componentsor servicesin IT parlance This is why European techshynologists such as Lutz Heuser head of reshysearch at SAP a German software giantlike to refer to it as the internet of sershyvices The cloud metaphor seems moreapt The internet is used mainly by peoplewith personal computers and a physicalnetwork connection Cloud applicationson the other hand will be used by billionsof devices of all kinds many of them unshytethered but will be connected to the inshyternet of things

In some ways the cloud is already hangshying in the sky especially for consumers Acshycording to a recent study 69 of Amerishycans connected to the web use some kind

of cloud service including webshybasedeshymail or online data storage (see chart 2)The best example is Google the biggest onshyline search company by far which now ofshyfers a plethora of webshybased applicationssuch as wordshyprocessing or online spreadshysheets

Learning to oatCompanies too have been moving intothe cloud albeit much more cautiously Fishynancial institutions in particular have forsome time been building computinggrids Firms that provide enterprise softshyware as a service (SaaS) over the internetsuch as Salesforcecom and NetSuite havebeen growing steadily

In the years to come companies are likeshyly to venture much farther For one operashytors of computing clouds such as Amazonand Google have shown that this is a farmore ecient way of running IT systemsSecondly many rms will nd they haveno choice The way in which their IT infrashystructure has grown is proving unsustainshyable Most corporate data centres today arecomplex warrens of underused hardwarethat require more and more people spaceand power to keep them going The currenteconomic malaise will increase the presshysure on companies to become more eshycient More has to be done with less whichis cloud computingrsquos main promise

This special report will chronicle therise of the cloud and try to predict where itis heading It will start by looking at thetechnology Computing clouds are imshymensely complex but can be roughly dishyvided into three layers infrastructure apshyplications and the periphery where theymeet the real world These will be discussshyed in turn The report will go on to considerthe impact the cloud will have on the IT inshydustry and the economy as a whole Theconclusion will look at what might stopthe cloud from growing ever thicker regushy

lation and worries about the safety of bothpersonal and corporate data

Irving WladawskyshyBerger a technolshyogy visionary at IBM compares cloudcomputing to the Cambrian explosionsome 500m years ago when the rate ofevolution speeded up in part because thecell had been perfected and standardisedallowing evolution to build more complexorganisms Similarly argues Mr WladawshyskyshyBerger the IT industry spent much ofits rst few decades developing the basiccomponents of computing Now thatthese are essentially standardised biggerand more diverse systems can emergeFor computing to reach a higher level hesays its cells had to be commoditised 7

2A young cloud

Source Pew Internet amp

American Life Project

Survey based on 1553 internet usersdagger35 of internet users connecting

to Wi-Fi away from home or work

Cloud-computing activities by age cohortsApril-May 2008 of users

0 25 50 75 100

Web-mail services

Store personalphotos

Onlineapplications

Store personalvideos

Pay to storecomputerfiles online

Back up hard driveto an online site

Have done atleast one activity

Have done atleast two activities

All internet users(All laptop usersdagger)

56(64)

34(44)

29(38)

7(13)

5(10)

5(9)

69(79)

40(52)

Ages 18-29

30-49

50-64

65+

1Cumulonimbus

Source Google Trends

Cloud computing average weekly search volumesSeptember average 2007=100

S O N D

2007J F M A M J J A S

2008

0100

200

400

600

800

1000

The Economist October 25th 2008 A special report on corporate IT 3

1

IT IS almost as easy as plugging in a laserprinter Up to 2500 serversin essence

soupedshyup personal computersarecrammed into a 40shyfoot (13shymetre) shippingcontainer A truck places the container inshyside a bare steelshyandshyconcrete buildingWorkers quickly connect it to the electricgrid the computer network and a watersupply for cooling The necessary softwareis downloaded automatically Within fourdays all the servers are ready to dish upvideos send eshymails or crunch a rmrsquos cusshytomer data

This is Microsoftrsquos new data centre inNorthlake a suburb of Chicago one of theworldrsquos most modern biggest and most exshypensive covering 500000 square feet(46000 square metres) and costing$500m One day it will hold 400000 servshyers The entire rst oor will be lled with200 containers like this one Michael Mashynos the head of Microsoftrsquos data centres isreally excited about these containers Theysolve many of the problems that tend tocrop up when putting up huge data censhytres how to package and transport serverscheaply how to limit their appetite for enshyergy and how to install them only whenthey are needed to avoid leaving expenshysive assets idle

But containers are not the only innovashytion of which Mr Manos is proud Microshysoftrsquos data centres in Chicago and acrossthe world are equipped with software thattells him exactly how much power eachapplication consumes and how much carshybon it emits Wersquore building a global inforshymation utility he says

Engineers must have spoken with simishylar passion when the rst moving assemshybly lines were installed in car factories alshymost a century ago and Microsoftrsquos datacentre in Northlake just like Henry Fordrsquosrst large factory in Highland Park Michishygan may one day be seen as a symbol of anew industrial era

Before Ford revolutionised carmakingautomobiles were put together by teams ofhighly skilled craftsmen in customshybuiltworkshops Similarly most corporate datacentres today house armies of systemsadministrators the craftsmen of the inforshymation age There are an estimated 7000such data centres in America alone most

of them oneshyo designs that have grownover the years reecting the history ofboth technology and the particular use towhich it is being put It is no surprise thatthey are egregiously inecient On avershyage only 6 of server capacity is used acshycording to a study by McKinsey a consulshytancy and the Uptime Institute athinkshytank Nearly 30 are no longer in useat all but no one has bothered to removethem Often nobody knows which applishycation is running on which server A wideshyly used method to nd out is Letrsquos pull theplug and see who calls

Limited technology and misplaced inshycentives are to blame Windows the mostpervasive operating system used in datacentres allows only one application to runon any one server because otherwise itmight crash So IT departments just keptadding machines when new applicationswere needed leading to a conditionknown as server sprawl (see chart 3)This made sense at the time servers werecheap and evershyrising electricity bills weregenerally charged to a companyrsquos facilitiesbudget rather than to IT

To understand the technology neededto industrialise data centres it helps to lookat the history of electricity It was only afterthe widespread deployment of the rotaryconverter a device that transforms onekind of current into another that dierentpower plants and generators could be asshysembled into a universal grid Similarly atechnology called virtualisation now alshylows physically separate computer sysshytems to act as one

Virtually newThe origins of virtualisation go back to the1960s when IBM developed the technolshyogy so that its customers could make betteruse of their mainframes Yet it lingered inobscurity until VMware now one of theworldrsquos biggest software rms applied it tothe commodity computers in todayrsquos datacentres It did that by developing a smallprogram called hypervisor a sort of elecshytronic trac cop that controls access to acomputerrsquos processor and memory It alshylows servers to be split into several virtualmachines each of which can run its ownoperating system and application

In a way wersquore cleaning up Microsoftrsquossins says Paul Maritz VMwarersquos boss anda Microsoft veteran and in doing so wersquoreseparating the computing workload fromthe hardware Once computers have beshycome more or less disembodied all sortsof possibilities open up Virtual machinescan be red up in minutes They can bemoved around while running perhaps toconcentrate them on one server to save enshyergy They can have an identical twinwhich takes over should the original failAnd they can be sold prepackaged as virshytual appliances

VMware and its competitors whichnow include Microsoft hope eventually toturn a data centreor even several oftheminto a single pool of computingstorage and networking resources that canbe allocated as needed Such a realshytimeinfrastructure as Thomas Bittman ofGartner calls it is still years o But the necshyessary software is starting to become availshyable In September for instance VMwarelaunched a new virtual datashycentre opershyating system

Perhaps surprisingly it is Amazon a bigonline retailer that shows where things areheading In 2006 it started oering a comshyputing utility called Amazon Web Services(AWS) Anybody with a credit card canstart say a virtual machine on Amazonrsquosvast computer system to run an applicashytion such as a webshybased service Develshyopers can quickly add extra machines

Where the cloud meets the ground

Data centres are quickly evolving into service factories

3Voracious

Source IDC

Worldwide spending $bn on

FORECAST

0

50

100

150

200

250

0

10

20

30

40

50

1996 98 2000 02 04 06 08 11

New servers

Server management and administration

Power and cooling Serversinstalledbase m

4 A special report on corporate IT The Economist October 25th 2008

2 when needed and shut them down if thereis no demand (which is why the utility iscalled Elastic Computing Cloud or EC2)And the service is cheap a virtual machshyine for instance starts at 10 cents per hour

If Amazon has become a cloudshycomshyputing pioneer it is because it sees itself asa technology company As it branched outinto more and more retail categories it hadto develop a sophisticated computing platshyform which it is now oering as a servicefor a fee Of course this has nothing to dowith selling books says Adam Selipsky incharge of product management at AWSbut it has a lot to do with the same techshynology we are using to sell books

Yet Amazon is not the only big onlinecompany to oer the use of industrialshyscale data centres Google is said to be opshyerating a global network of about threedozen data centres loaded with more than2m servers (although it will not conrmthis) Microsoft is investing billions andadding up to 35000 servers a month Othshyer internet giants such as Yahoo are alsobusy building huge server farms

In some places this has led to a veritabledatashycentre construction boom Half a dozshyen are being built in Quincy a hamlet inthe middle of Americarsquos Washington stateclose to the Columbia River The attractionis that its dams produce plenty of lowshycostpower which apart from IT gear is themain input for these computing farms Onaverage cooling takes as much power ascomputing Microsoftrsquos new data centrenear Chicago for instance has three subshystations with a total capacity of 198MW asmuch as a small aluminium smelter

But cheap electricity is only one albeitimportant criterion for choosing the site ofa data centre Microsoft currently feeds 35sets of data into an electronic map of theworld including internet connectivity theavailability of IT workers even the airquality (dry air makes a good coolant) tosee where conditions are favourable andwhich places should be avoided Apparshyently Siberia comes out well

Google for its part seems to be thinkshying of moving oshore In August it apshyplied for a patent for watershybased data censhytres Computing centres are located on aship or ships anchored in a water bodyfrom which energy from natural motion ofthe water may be captured and turnedinto electricity andor pumping power forcooling pumps to carry heat away saysthe patent application

Many chief information ocers wouldlove to take their IT infrastructure out tosea and perhaps drown it there Even as deshy

mand for corporate computing continuesto increase IT budgets are being cut At thesame time many rmsrsquo existing IT infrashystructure is bursting at the seams Accordshying to IDC a marketshyresearch rm a quarshyter of corporate data centres in Americahave run out of space for more servers Forothers cooling has become a big constraintAnd often utilities cannot provide the extrapower needed for an expansion

Fewer bigger betterSo IDC thinks that many data centres willbe consolidated and given a big makeoverThe industry itself is taking the lead For exshyample HewlettshyPackard (HP) used to have85 data centres with 19000 IT workersworldwide but expects to cut this down tosix facilities in America with just 8000employees by the end of this year reducshying its IT budget from 4 to 2 of revenue

Other large organisations are followingsuit Using VMwarersquos software BT a teleshycoms rm has cut the number of servers in

its 57 data centres across the world from16000 to 10000 yet increased their workshyload The US Marine Corps is reducing thenumber of its IT sites from 175 to about 100Both organisations are also starting tobuild internal clouds so they can move apshyplications around Ever more rms are exshypected to start building similar inshyhouse orprivate clouds The current economicmalaise may speed up this trend as compashynies strive to become more ecient

But to what extent will companies outshysource their computing to public cloudssuch as Amazonrsquos James Staten of Forresshyter Research a marketshyresearch rm saysthe economics are compelling particularlyfor smaller rms Cloud providers he sayshave more expertise in running data censhytres and benet from a larger infrastrucshyture Yet many rms will not let companydata oat around in a public cloud wherethey could end up in the wrong hands Theconclusion of this report will consider thequestion of security in more detail

It does not help that Amazon and Gooshygle recently made headlines with serviceinterruptions Few cloud providers todayoer any assurances on things like conshytinuity of service or security (called sershyviceshylevel agreements or SLAs) or take onliability to back them up

As a result says Mr Staten cloud comshyputing has not yet moved much beyondthe earlyshyadopter phase meaning thatonly a few of the bigger companies are usshying it and then only for projects that do notcritically aect their business The Washshyington Post for instance used AmazonrsquosAWS to turn Hillary Clintonrsquos WhiteHouse schedule during her husbandrsquostime in oce with more than 17000 pagesinto a searchable database within 24hours NASDAQ uses it to power its serviceproviding historical stockmarket informashytion called Market Replay

Stefan van Overtveldt the man incharge of transforming BTrsquos IT infrastrucshyture thinks that to attract more customersservice providers will have to oer virtualprivate clouds fenced o within a publiccloud BT plans to oer these as a servicefor rms that quickly need extra capacity

So there will be not just one cloud but anumber of dierent sorts private ones andpublic ones which themselves will divideinto generalshypurpose and specialised onesCisco a leading maker of networking gearis already talking of an intercloud a fedshyeration of all kinds of clouds in the sameway that the internet is a network of netshyworks And all of those clouds will be fullof applications and services 7

The Economist October 25th 2008 A special report on corporate IT 5

1

WANT to become a programmer in 20minutes With the program from Iceshy

berg a startshyup you can Just open the getshyting started wizard and pick the type ofapplication say project managementType in its business objectsthings likeclient team and membersand tellthe tool how they relate to each otherThen design some input forms and denethe process for getting a project done Anshyother click and you are ready to go

In reality of course things are not thatsimple And many professional programshymers will sco at the development tool asa mere toy Yet Iceberg and similar outtsdemonstrate that geeks are losing their moshynopoly on programming Now with a bitof patience anybody can create a simpleapplication for instance to collaboratewith colleagues or to draw an online map

This democratisation of programminghowever is only a small part of somethingmuch deeper a fundamental change in thenature of software It is not just that moreand more software will become a servicedelivered online More importantly applishycations webshybased or not will no longercome as a big chunk of software but willbe made up of a combination of electronicservicesa shift that has picked up a lot ofspeed since computing began moving intothe cloud

To understand this new way of buildshying applications known as serviceshyorishyented architecture (SOA) think of a culishynary analogy Whereas the old chunk ofsoftware resembles a precooked meal thatjust has to be popped into the oven thenew architecture is more like a restaurantIt is a service in itself but also a combinashytion of subshyservices There is the waiter

who takes the order and conveys it to thekitchen There is the cook who preparesthe food And there are the cleaners whokeep the place tidy Together they create theapplication a restaurant

An attack of the vapoursThe importance of this shift from a monoshylithic product to services is hard to overshystate In a sense it has seeded the cloud alshylowing the dropletsthe services thatmake up the electronic vapourto form Itwill allow computing to expand in all dishyrections and serve ever more users Thenew architecture also helps the less technishycally minded to shape their own cloudsusing such tools as Icebergrsquos

Just as for the industrialisation of datacentres there is a historic precedent for thisshift in architecture the invention of movshyable type in the 15th century At the timeprinting itself was not a new idea But itwas Gutenberg and his collaborators whothought up the technologies needed tomake printing available on a mass scalecreating letters made of metal that could bequickly assembled and reshyused

Similarly the concept of modularityhas been around since the early days ofcomputing Everything in computer scishyence is to just write less code What is thetechnique for writing less code Itrsquos calledsubroutines said Bill Gates Microsoftrsquosfounder in a recent interview A subroushytine is a part of a program that can be reshyused just like movable type The idea saysMr Gates has always been to apply thisprinciple of a subroutine more broadly

Yet this did not happen mainly beshycause the cost of computing fell much fastshyer than that of communications Ever

cheaper and more powerful chips made itpossible to move from mainframes tominicomputers to personal computers(PCs) and now to handshyheld devices Butconnecting all these pieces remained dishycult and expensive which meant that suchdevices all had to come with their owndata and chunky programs Now thanks toplenty of cheap bandwidth and more andmore wireless connectivity computing isable to regroup into specialised services orMr Gatesrsquos subroutines We now live in aworld whereeth[a] subroutine can exist onanother computer across the internet

Part of Gutenbergrsquos genius was to recogshynise the need for all the letters to be identishycal in height so they could be easily comshybined Similarly for computing services towork there had to be robust technical stanshydards Only a few years ago this seemed farbeyond the IT industryrsquos reach Most rmsinsisted on their proprietary technologymostly to lock in their customers Againcheaper communications helped to bringabout change The success of the internetdemonstrated the huge benets of openstandards and forced vendors to agree oncommon ways for their wares to work toshygether One result is a stack of somethingcalled webshyservices standards

Serviceshyoriented architecture rstshowed up in openshysource software butwas quickly adopted by big enterpriseshysoftware vendors because they had apressing need for it says Jim Shepherd ofAMR Research a consultancy Big softwarevendors for instance had to nd a way tountangle the hairball of code that their proshyducts had become or else they themselveswould choke on it Customers wantedmore exible and extensible programs

Creating the cumulus

Software will be transformed into a combination of services

6 A special report on corporate IT The Economist October 25th 2008

2 Think back to the gastronomic examshyple A precooked meal is hard to changeand so are traditional software applicashytions By contrast a restaurant can easilychange its menu and its style of operationSimilarly SOAshybased software allowscompanies to alter their business processshyes such as the way they handle orders tocollect cash

SAP a German software rm was oneof the rst companies to put this serviceshyoriented architecture front and centreStarting in 2003 it developed among othshyer things a new corporateshysoftware packshyage that did away with monolithic applicashytions such as programs to keep track of acompanyrsquos nances or manage its relationshyship with customers Instead it introduceda collection of reshyusable components thatcould be strung together at will

IBM too is a fan of SOA and web sershyvices But its approach is somewhat diershyent given that it does not sell business apshyplications but makes most of its moneyfrom IT services and software to managethe underlying computing infrastructureIBM uses SOA mainly to help rms inteshygrate their increasingly complex and dispashyrate IT systems Its software turns theminto a collection of services that can bewoven into business processes

The approaches may be dierent butthe vision is the same to create IT systemsthat adapt to the business needs of compashynies and allow them to connect When Iwant to do something new explainsSteve Mills the boss of IBMrsquos softwaregroup I do not need to build a new applishycation but can use the pieces I alreadyhave To Peter Zencke who led the develshyopment of SAPrsquos new package its most exshyciting feature is that any of the processcomponents can now become a serviceprovided by some other rm

Despite millions of dollars spent onmarketing SOA it has not really taken oyet But many webshybased applications forconsumers rely on this concept The primeexample is Google Maps When the onlinegiant launched the service programmersquickly gured out how to mix the mapswith other sources of information This ishow for example Housingmapscom wascreated a combination of a Google mapwith the rental and sales listings fromCraigslist a website for classied ads Itwas one of the rst mashshyups as suchcombinations have come to be called

Since then the number of such mashshyups has exploded thanks mainly to sershyvices like Microsoftrsquos Popy and YahooPipes In essence these are graphical proshy

gramming tools Users drag and dropmodulesdata feeds providing such inshyformation as pictures headlines andsearch resultsand weave them together

Most of these mashshyups are still toysbut rms oering software as a servicehave started oering similar combinashytions In April Salesforcecom and Googleannounced that they would integrate theironline services Users of Salesforce whichhelps rms manage their customer relashytionships can now quickly switch to Gooshyglersquos webshybased applications

Smaller rms have already started toweave a network of services OpSource aSilicon Valley startshyup for instance proshyvides basic services for other SaaS rmsand web companies TriCipher anotherCalifornian newcomer authenticates usshyers of web applications Ribbit for its partallows these services to add voice commushynications to their oerings

Yet it is unlikely that the software cloudwill end up as a vast nebula of thousandsof specialised services Even creating a sershyviceshyoriented architecture is no silver bulshylet against complexity in a famous phraseby Frederick Brooks an elder of computerscience Although web services allow onshyline oerings to connect for instance it iscostly to synchronise their data And itwould not make sense for any rm to betits business on simple mashshyups

As software markets mature they tendto form two kinds of clumps integratedsuites of applications and platforms ontop of which others can build programsBoth forms are already emerging On theapplications side there is Google Apps and

Zoho which is even more comprehensiveIt encompasses a total of 18 applicationsincluding word processing project manshyagement and customershyrelationship manshyagement (CRM)

As for platforms there are already plenshyty in dierent shapes and sizes For entershyprise applications SAP has built one calledNetweaver Oracle oers something simishylar called Fusion Last year Salesforcelaunched a platform as a service allowshying other rms to use the plumbing thatsupports its own CRM oering

More recently platforms for consumerservices have been proliferating Faceshybook a social network was the rst to beshycome one in 2007 Other big online rmshave followed suit or will do so soon Gooshygle with App Engine Yahoo with YOSand Microsoft with a cloud operating sysshytem thought to be called Windows StrataSome predict a platform war to rival theepic ghts between Microsoftrsquos Windowsand Applersquos Macintosh

Never say dieWhat shape will the software cloud takeother than being a vast collection of sershyvices In one way it will look much like theold software world There will be a few bigplatforms akin to todayrsquos operating sysshytems and most applications will be writshyten to one of these platforms

What is less clear is just how much ofbusiness and consumer software will mishygrate into the cloud and how fast The anshyswer depends on whom you ask Unsurshyprisingly Marc Benio Salesforcersquosfounder and chief executive argues thatweb applications will spell the death ofsoftware But people are not about tothrow out their powerful PCs or other clishyent devices if only because many ofthem still work oine at times Similarlycompanies will always want to keep someapplications inshyhouse for reasons of secushyrity regulation or simply to maintain conshytrol Ray Ozzie Microsoftrsquos chief softwarearchitect promotes something calledsoftware plus services meaning thatcustomers will settle on the right mix ofold and new stu

If history is any guide Mr Ozzie is moreon the mark Even the biggest changes in IThave never spelt the death of anythingnotes Josh Greenbaum of Enterprise Apshyplications Consulting IBM for instance isstill making money with mainframes

So the software cloud just like its hardshyware underpinnings will be very diverseBut how will people make use of this kindof computing 7

4Looming ever larger

Source Gartner

Within the enterprise application

markets daggerEstimate

Worldwide software-as-a-service revenue $bn

2005 06 07dagger 08 09 10 110

2

4

6

8

10

12

200

159

90

259

957

Compound annual growthrate 2006-2011

291

Content communications and collaborations

Enterprise-resource planning

Supply-chain management

Customer-relationship management

Office suites and digital-content creation

Others

F O R E C A S T

The Economist October 25th 2008 A special report on corporate IT 7

1

IT WILL take something with a lot morebang to replace a medium that is thoushy

sands of years old That was the prevailingreaction when Amazon last November anshynounced the launch of Kindle an electronshyic book reader the size of a paperback thatcan store more than 200 volumes Yet bythe end of this year Amazon will have soldnearly 380000 Kindles says Mark Mahashyney an analyst with Citigroup a bankTurns out the Kindle is becoming the iPodof the book world he recently wrote in anote to clients in a reference to Applersquosiconic music player

It is certainly not the Kindlersquos looks thatexplain its success Compared with theiPod its design looks very last centurySoftware and battery life too leave a lot tobe desired The chief attraction of the deshyvice is the ease with which it can be used tobuy books and other content Equippedwith a mobileshyphone modem the Kindlecan simply pull new reading material outof the air Users do not even have to have awireless service contract Our vision is tohave every book that has ever been inprint available in less than 60 seconds exshyplains Je Bezos Amazonrsquos boss

It remains to be seen whether the Kinshydle will become a cultural phenomenonlike the iPod of which around 160m havebeen sold so far Amazon for its part isdownplaying the Kindlersquos success and willnot conrm any sales estimates But it issafe to say that once the next generation ofwireless networks is up and running hunshydreds of millions of devices will come likethe Kindle with builtshyin radio connectivity(see chart 5) Digital cameras will automatishycally upload pictures Smart meters willsend readings of how much electricity ahouse consumes All kinds of sensors willbe able to send messages even things likedipsticks when tanks of liquid are low

The relationship of these devices tocloud computing may not be obvious Butif huge data centres and applications makeup the cloud itself then all the hardwareand software through which it connectsand communicates with the real world areits periphery In IT speak this is known asthe front end or client side

As the Kindle and other examplesshow this layer does not have much to do

with the user interface or client device ofold It will do a lot of computing itself Itwill come in all shapes and sizes dependshying on what the user wants to do And itwill not just distribute information as theweb does but collect it as well The analoshygy that springs to mind here is a theatreperformance with audience participationthe electronic cloud will adapt to whateverit engulfs

As you like itJust like computing itself the dominantuser interface has evolved continually Inthe days of the mainframe when computshyers and their peripherals lled entirerooms people communicated with thesemachines rst via punch cards and thenvia greenshyglowing monitors which weresimply dumb terminals Only with the riseof personal computers did the user intershyface become more intelligent responsiveand graphical

The rst version of the web was thus abrief step backward To be sure browsersbrought colour and graphics to the hithershyto textshybased internet but they were asdumb as the mainframe terminal This haschanged only in recent years A bundle ofwebshydevelopment techniques dubbedAJAX and multimedia software such asAdobersquos Flash and Microsoftrsquos Silverlightnow allow programmers to write what arecalled rich internet applications (RIA)

Whatever the buzzword the principleis much the same Servers no longer dishup simple hypertext markup language(HTML) the webrsquos early lingua franca Inshycreasingly web pages are bona de piecesof software that are executed in the browsshyer Users of Web 20 sites who venture intomenu items such as view source in theirbrowsers can sometimes see thousands oflines of code

In recent months the browser has beshycome even more of a platform for otherprograms akin to an operating systemsuch as Windows The main driver of thistrend is Google with its huge strength indistribution that can only gain from moreand more software being oered as a sershyvice In May 2007 the Silicon Valley rmlaunched Gears a program that allowsweb applications to be used oine and inSeptember this year it released a newbrowser called Chrome Its most imporshytant feature is that it can execute several soshyphisticated web applications at once

Although for now the internet browserwill remain the main vehicle for people tointeract with the cloud other forms arecoming to the fore One is the widget asnippet of code that often lives on a PCrsquosdesktop and allows the user to get a quickpersonalised view of a set of data The ideais that a salesperson for instance shouldnot have to re up an entire application forcustomershyrelationship management tond out which leads to follow up

More importantly there is now a greatshyer variety of hardware through which toaccess the cloud Already desktop and lapshytop computers are starting to lose their moshynopoly for surng the web as smaller deshyvices such as smart mobile phones andvarious forms of portable computers startto compete with them

Asus a Taiwanese computershymakerstarted the trend when it launched a smallcheap laptop called Eee a year ago Nowthere are dozens of these devices Gartnerreckons that 52m of these minishynoteshybooks will be sold this year 8m next andas many as 50m in 2012

Perhaps the best indicator of things tocome is Intel a huge chipmaker It made afortune selling processors for servers pershysonal computers and laptops In June the

On the periphery

The cloudrsquos communications with its clients will become ever more intelligent and interactive

5Chatterboxes

Source iSuppli

Worldwide shipments of electronic productswith built-in wireless capability bn

2003 04 05 06 07 08 09 10 11 120

05

10

15

20

25

30

Local-area

Products with embedded wireless networking

Wide-areaTotal cellularhandsets

F O R E C A S T

8 A special report on corporate IT The Economist October 25th 2008

2 rm launched a new line of chips calledAtom designed to power what it calls netshybooks and mobile internet devices(MIDs) mainly intended for surng theweb Intel is also the driving force behindWiMAX a technology for wireless broadshyband access to the internet It wants to puta WiMAX radio chip into as many devicesas possible from portable computers tospecialised gadgets such as the Kindle

Applersquos iPhone and its App Storewhich allows iPhone and iPod owners todownload applications also provide aforetaste of how important wireless deshyvices will be for the cloud Apple launchedApp Store only in July Two months later ithad already tallied 100m downloadsmeaning that it took o much faster thanApplersquos highly successful iTunes musicstore Many of the programs on oer conshynect to the cloud including news feedsmultishyplayer games and a service thatkeeps track of the latest polls for Americarsquospresidential election

You can take it with youThe plethora of devices wirelessly conshynected to the internet will speed up a shiftthat is already under way from a deviceshycentric to an informationshycentric worldin the words of VMwarersquos Paul Maritz Upin the cloud there will be a body of data foreach individual that will accompany themthrough life he explains and it will not betied to any particular device as it is today

Again what will make this possible is

virtualisationthis time of client devicesnot servers With the help of software fromVMware and others some rms have alshyready virtualised their employeesrsquo desktopcomputers which allows them to be manshyaged centrally Operating systems and apshyplications will no longer run only on theemployeersquos PC but on a virtual machine ina data centre that can be accessed remotelytheoretically from any PC in the worldSooner or later mobile devices will also beshycome virtualised Users will be able to usetheir applications and data on whichevergadget they have at hand

Yet the cloudrsquos interface is designed notmerely to provide information but to gathshyer it as well The future belongs to servicesthat respond in real time to informationprovided either by their users or by nonshyhuman sensors predicts Tim OrsquoReilly thefounder of OrsquoReilly Media a publisher oftechnology books who coined the termWeb 20 Such live applications hesays will get better the more data they areable to collectand there will be plenty asthe cloud expands

One of the rst examples of such a sershyvice was Google What originally put thesearch service ahead of the competitionwhen it was launched a decade ago was itsway of harvesting the information providshyed by web users in linking to other sitesthe more links point to a page the moreuseful it must be These days most links aregenerated by computers so the originalform of this page rank algorithm has

long since been scrapped But Googlersquos apshyproach is still the same mining informashytion provided by web users such as theirsearch histories to provide more relevantsearch results and more eective and tarshygeted advertising

The direct link to users also allows rmssuch as Google continuously to improvetheir interface something traditional softshywareshymakers were not able to do At anygiven time Google is running dozens oftests to optimise the look and feel of its ofshyferings This makes web applications farless technologyshydriven and much moreusershyoriented says IBMrsquos Mr WladawskyshyBerger They are much more inspired bywhat goes on in the real world

A raft of startshyups is also trying to builda business by observing its users in eectturning them into human sensors One isWesabe (in which Mr OrsquoReilly has investshyed) At rst sight it looks much like any pershysonalshynance site that allows users to seetheir bank account and creditshycard inforshymation in one place But behind the scenesthe service is also sifting through its memshybersrsquo anonymised data to nd patterns andto oer recommendations for future transshyactions based for instance on how much aparticular customer regularly spends in asupermarket Wireless devices too will inshycreasingly become sensors that feed intothe cloud and adapt to new information

Nokia for its part is planning to buildall kinds of sensors into mobile phones tomonitor things like movement barometricpressure or even the ownerrsquos healthwhich many experts expect to become abig new trend Sensors could also be usedto record peoplersquos activities creating whatsome already term a lifelograising allkinds of privacy concerns

As wireless technology gets better andcheaper more and more dierent kinds ofobjects will connect directly to the cloudSAP the German softwareshymaker haslaunched a research project called The Inshyternet of Things to see what can be donewith the resulting information As part ofthat project an initiative called the FutureFactory is now under way to investigatehow intelligent tags can make manufacturshying more adaptive and ecient

More and more data get you only so farhowever In the end Googlersquos search reshysults and its textshybased online advertiseshyments are relevant to users only becausethe rm has devised clever ways to siftthrough them says Hal Varian the rmrsquoschief economist The big challenge of thecloud will be to connect the myriad data init and make them protable 7

The Economist October 25th 2008 A special report on corporate IT 9

1

EVEN elephants can die In 1993 extincshytion came close for IBM then the

worldrsquos largest computershymaker (it hassince been overtaken by HP) Its mainshyframe business was collapsing and protswere plummeting At that point LouisGerstner took over as chief executive andmanaged to turn the company aroundOnly a handful of people understandhow precariously close IBM came to runshyning out of cash in 1993 he writes in hismemoir Who Says Elephants CanrsquotDance Whether we would have had tole for bankruptcy I canrsquot say

There are many reasons why IBM nearshyly went bellyshyup not least the fact that BigBlue had become a bureaucratic monsterBut most critically it had failed to adapt tothe industryrsquos rst big platform shiftwhich only really made itself felt in the earshyly 1990s the move from mainframes tosmaller machines rst soshycalled minicomshyputers then personal computers IBMwas slow very slow in delivering distrishybuted computing and many small compashynies moved in to ll the gap Mr Gerstnerwrites

It is unlikely that the move into thecloud will produce a similar nearshydeath exshyperience or even a real casualtyif only beshycause IBM still stands as a warning Butthat does not mean that the structure of theIT industry will remain unchanged northat the economics will stay the sameOnce the IT sky really clouds over individshy

ual rmsrsquo share of the global IT budget (seechart 6) will shift

The move to distributed computingwhich started in the midshy1980s led to a bigchange in the IT industry In the era of themainframe computing came in a verticallyintegrated package mainly from IBM Withdistributed computing the industry beshycame a stack of horizontal layers In corshyporate IT these were mainly hardware thenetwork infrastructure software (such asoperating systems and databases) entershyprise applications and IT services

Not all of these layers were createdequal Computershymakers commanded athicker one for instance but software comshypanies were more protable The key proshygram was the operating system both onservers and on personal computers (clishyents) It was the standard to which othercomponents of IT systems had to conformUsually this was a version of Windowswhich made Microsoft the IBM of this newera of computing

Cloud computing is unlikely to bringabout quite such a dramatic shift In esshysence what it does is take the idea of distrishybuted computing a step farther Still it willadd a couple of layers to the IT stack One ismade up of the cloud providers such asAmazon and Google The other is softwarethat helps rms to turn their IT infrastrucshyture into their own cloud known as a virshytual operating system for data centres

Drawing a neat diagram of the IT stack

will also become increasingly dicult beshycause the layers are becoming less distinctIn a world of services it often does notmake sense to think of hardware and softshyware separately argues Padmasree Warshyrior the chief technology ocer of CiscoBoth need to be blended to oer new sershyvices she says

Mix and matchEven though the IT stack may not changeall that much the perceived value of thedierent layers will shift and with it theamount of prot IT rms can make fromeach of them Who will lose and who willwin depends on how much of computing

Highs and lows

As IT gets cloudier the economics of the business will change

6Follow the money

Source Gartner Forecast

Worldwide end-user spending $trn

2006 07 08 090

1

2

3

4

Computer hardware

Software

IT services

Telecomsequipment

Telecoms services

10 A special report on corporate IT The Economist October 25th 2008

2

1

eventually moves into the cloud In the rst round almost everybody in

the IT industry will do well as the cloudsare being built The biggest winners arelikely to be hardwareshymakers says MarkStahlman of Gartner Hardware alwayswins when new demand for computing isuncovered And we havenrsquot had such asweeping global demand since the 1990s

But in the longer term there will be relashytive winners and losers The hardwarebusiness could actually nd itself in thelosing group Its margins could getsqueezed as cloud computing matures beshycause there will be fewer customers withmore buying power says James Staten ofForrester Research Large cloud providerscan dictate how to build servers and atwhat price he notes

All that may explain why hardwareshymakers were among the rst to jump onthe cloudshycomputing bandwagon So farthey have done only what Mr Staten callscloudshywashing relabelling existing proshyducts that help customers build a moreexible IT infrastructure But they are alsopreparing for a time when more moneycan be made building clouds than buildingcomputers IBM and HP for instance haveteamed up with other rms and universishyties to design new cloud architectures

Which side of the fenceIn the long run says Mr Staten hardwareshymakers may be torn between supplyingcloud providers or becoming providersthemselves Being both will not be easybecause the rms would be competingwith their biggest customers Dell seems tohave decided to be a cloud supplier SunMicrosystems is a candidate to become aprovider it is oering a cloudshylike servicecalled Networkcom albeit not very sucshycessfully HP and IBM already used to thebalancing act of selling hardware and proshyviding IT services will try to do both

Makers of traditional software will ndthe going even tougher With the advent ofopenshysource software in particular Linuxselling operating systems had already beshycome less protable In a virtual worldthey will become even more commodishytised which is bad news for MicrosoftMany business applications no longerneed a big generalshypurpose server operatshying system but can use a specialised onewhich should put pressure on prices Onclient computers more and more applicashytions are written to run in browsers not onany particular operating system

Makers of business applications arealso on the defensive Traditionally they

have made billions by selling their proshygrams often demanding hefty sums to inshystall them and then charging an annualmaintenance fee for upgrades and technishycal support But this highly lucrative busishyness model has come under increasingpressure says Michael Cusumano a proshyfessor at the Massachusetts Institute ofTechnology (MIT)

For one he says software vendors willhave to nd new ways to charge for theirwares in the cloud tying licensing fees tothe number of users for instance will bedicult since services will mostly be conshysumed by other machines More imporshytantly the corporate world has becomeless and less willing to buy software forlarge sums of money so software rms listshyed on Americarsquos stockmarkets now makemost of their prots from maintenanceand other services (see chart 7) SAP will inshycrease its annual maintenance fees to atleast 22 of a programrsquos value over thenext few years in line with those of Oracleits main rival

Yet the biggest challenge for softwarerms is to become providers of online sershyvices themselves says Brent Thill of Citi Inshyvestment Research So far they havemoved slowly oering SaaS only on theside if at all This was partly because theircustomers were not that keen But moreimportantly notes Mr Thill the softwarehouses are still wedded to their old busishyness model With SaaS they do not get a bigupfront payment only subscription fees

Once Salesforce and NetSuite hadshown that the SaaS model works the inshycumbents began to move faster In Septemshyber last year for instance SAP presentedBusiness ByDesign a package of webshybased enterprise applications for smallerbusinesses But success will not come easishyly SAP has slowed down the introductionof the new service because it still needs towork out how to run it cheaply enough tomake a reasonable prot

Pure SaaS providers also have a lot ontheir minds Some experts such as JoshuaGreenbaum of Enterprise ApplicationsConsulting reckon that few will ever be asprotable as traditional software rms Alshythough it is almost a decade old Salesforcestarted making money only in 2006 mainshyly because it rst had to spend heavily onmarketing to attract customers But nowthat the service has 1m users and revenuesof more than $1 billion these costs willcome down says the rm

The companies that have the bestchance of making money from the cloudare those that get things to connect and

work together and help customers movetheir computing around This is music tothe ears of big IT rms not least IBM Nearshyly 80 of its revenues come from infrashystructure software and IT services which itcan oer globally HP is catching up havingtaken over EDS another big ITshyservicesrm Both Microsoft and SAP for their partbelieve that rms will want to have achoice in where to do their computing aswell as the exibility to move thingsaround over time

Two potentially important contestantsare rarely mentioned Cisco and EMC theleading makers of networking and storagegear respectively Having invested a lot insoftware and services Cisco has becomemore than just the source of most of theworldrsquos routers the trac cops of the intershynet It is betting that in the cloud the netshywork layer will become more importantfor instance to ensure that computingworkloads are able to move around seshycurely EMC for its part has made two dozshyen cloudshyrelated investments andlaunched a cloudshyinfrastructure division

Whoever manages to own the domishynant operating system for the data centrecould become a big winner VMware isbound to have a shot at this As well as beshying the market leader in virtualisation ithas the support of EMC which holds 86of the rm But the competition is likely tobe intense

Will this prospective platform war proshyduce a dominant company in the mould ofIBM or Microsoft that is able to extractmore than its fair share of the prots Probshyably not because it will be relatively easyto switch between vendors says GeorgeGilbert of Tech Strategy Partners a consulshytancy Nor is it likely that one rm willmanage to build a global cloud monopolyAlthough there are important economiesof scale in building a network of data censhy

7Serving up a treat

Source Michael Cusumano

Massachusetts Institute of Technology

US-listed software-firmsrsquo sales of total

1990 92 94 96 98 02 042000 06

03

04

05

06

07

Services

Products

The Economist October 25th 2008 A special report on corporate IT 11

2

1

BUSINESSES as well as most organishysations outside the business world

begin to shift from hierarchical processesto networked ones Nearly every facet ofhuman activity is transformed in someway by the emergent fabric of interconnecshytion This reorganisation leads to dramaticimprovements in eciency and producshytivity So said Wired magazine the centralorgan of Web 10 in July 1997 in an essay enshytitled The Long Boom arguing that theworld was in for 25 years of prosperityfreedom and a better environment Backthen the article reected the general optishy

mism that led up to the internet bubbleNow after two busts several wars andgrowing fears of global warming it makesfor somewhat surreal reading

The cloud lends itself to similar hypershybole Yet so far there has not been much deshybate about its economic falloutprobablybecause the new economy ended badlyand the newest one is currently doing evenworse There will be many ways in whichthe cloud will change businesses and theeconomy most of them hard to predict butone theme is already emerging Businessesare becoming more like the technology itshy

self more adaptable more interwovenand more specialised These developshyments may not be new but cloud computshying will speed them up

Corporate IT has always promised tomake companies more agile In the 1990smany companies reshyengineered their busishyness processes when they started using aform of software called enterpriseshyreshysource planning (ERP) which does thingssuch as managing a rmrsquos nances andemployees But once these massive softshyware packages were in place it was exceedshyingly dicult to change them Implementshy

The long nimbus

The cloud will make businesses more adaptable interconnected and specialisedand often smaller

tres the computing needs of companiesand consumers vary too widely for onesize to t all

Even if the cloud is likely to transformthe IT industry some things will stay thesame One is the importance of lockshyin Ifanything companies and developers willbe even more dependent on cloud platshyforms and applications than they are onthe old kind SaaS promotes the hollowshying out of IT a rm that needs to migrateto another system will no longer have therequired expertise When Facebook saymakes a change to its platform developershave no choice but to go along with itSome are already calling for a CloudComputing Consortium in the mould ofthe World Wide Web Consortium (W3C)to set standards that allow applications tomigrate easily from one platform to anothshyer One standard initiative called OpenshySocial already allows the same webshybased application to run in several socialnetworks which are also clouds of sorts

But standards go only so far Some fearthat one company could try to monopoliseother key parts of the cloud ironically Mishycrosoft worries that Google is doing exactshyly that with the online advertising marketTo Steve Ballmer Microsoftrsquos boss Gooshyglersquos advertising platform is like a ywheelthat picks up speed as more websites atshytract more advertisers and vice versa

Eric Schmidt Googlersquos chief executivedenies any evil intent to achieve worlddomination He argues with some justicethat it would be hard for Google to controlthe cloud if only for technical reasonsmuch of it is already based on open stanshy

dards and its loose structure does not lenditself to locking customers in

Mr Schmidt promises that Google willnot lock its users in either Our competishytive advantage is not from lockshyin he saysbut from having specialised knowledgeof how to build data centres and how tobuild new software that is not reproducshyible such as our search algorithm This ishow we make our money

Yet Google is more like Microsoft than itlikes to admit says Nicholas Carr a techshynology writer and blogger Microsoft heargues achieved its dominant position inthe PC world not least by commoditising

products such as the browser that arecomplementary to its cash cows such asWindows as their cost came down deshymand for Microsoftrsquos products went up

Similarly Googlersquos natural instinct is todo its utmost to encourage people to spendmore time online because that will givethe company more opportunities to selladvertisements and collect data aboutthem According to Mr Carr almost everyshything the company doesbuilding hugedata centres ghting copyright restrictionsdigitising the worldrsquos libraries developinga new browser and most recently evenhelping to launch satellitesis aimed at inshycreasing the use of the internet Googlewants information to be free he recentlywrote in his blog because as the cost of inshyformation falls it makes more money

But Google may never become as powshyerful as Microsoft because regulators areunlikely to let it Microsoft was eventuallyput in the dock for abusing its monopolybecause it got too greedy pushing most ofthe rest of the industry to complain Giventhat the world has already lived throughthe Microsoft drama and that Google willaect many more industries the searchcompany is likely to be restrained muchearlier The rm is currently in negotiationswith the US Justice Department about acontroversial advertising partnership beshytween itself and one of its competitors Yashyhoo which would further strengthenGooglersquos position in online advertising

Even if the economics of the cloud arestill in ux though it is already clear that itwill have farshyreaching implications forbusinesses and for society as a whole 7

12 A special report on corporate IT The Economist October 25th 2008

2

1

ing SAP the market leader in ERP is likepouring concrete into your company goesan old joke among IT types

This helps to explain why in manyrms IT departments and business unitshave traditionally been at loggerheads Inrecent years tensions have worsenedCompanies must grapple with evershychangshying markets and regulations yet IT budgetsare being cut Many rms now have a hugebacklog of IT projects

Hence the interest in cloud computingIt turns capital expenditure into operationshyal expenditure which makes things mucheasier and cheaper Instead of having toshell out a lot of money for say a server totest an application and even with luckwait a few weeks for it to be up and runshyning managers just have to whip out acredit card open an account at AmazonWeb Services (AWS) and re up a virtualmachine for a few dollars

In many rms senior managers probashybly do not even know that business unitsare using AWS or similar services In someorganisations however it has already beshycome a muchshyappreciated RampD tool Pharshymaceutical companies for instance areregularly tapping into AWS to calculatesimulations Sogeti a European consultanshycy has used a cloud built by IBM to allow itto test new ideas and quickly put togetheran IT system for a companyshywide brainshystorming event

Cloud services have also been hugelysuccessful with startshyups which can nowenjoy infrastructure of the same quality aslarge companies In fact AWS is probablythe main reason why there are now somany rms oering all kinds of Web 20services Their usefulness may sometimesbe hard to gauge but that is a good thing Itis a sign of lively combinatorial innovashytion made possible because entrepreshyneurs can cheaply try new combinationsof technology says Googlersquos Mr Varian

Many startshyups would probably noteven exist without the cloud Take Anishymoto a service that lets users turn photosinto artsy music videos using articial inshytelligence When it launched on Facebooka social network demand was such that ithad to increase the number of its virtualmachines on AWS from 50 to 3500 withinthree days You could give me unlimitedfunding says Adam Selipsky of AWSand I wouldnrsquot know how to deploy thatmany servers in 72 hours

Combinatorial innovation should alsobe made easier by the fact that the cloudwill be a huge collection of electronic sershyvices based on standards But this serviceshy

oriented architecture will be even moreimportant for existing rms because itshould free their inner workingstheirbusiness processesfrom the straitjacketof their ERP systems and allow these proshycesses to be more easily adapted for inshystance to launch a new product

Again the software industry has beenpromising this for some years under thebanner of serviceshyoriented architecturediscussed in an earlier chapter Yet theadoption of SOA has been slow and manyprojects have failed says Chris Howard ofthe Burton Group a consultancy The reashysons are not just technical but cultural forexample some business units are not usedto sharing data Cloud computing will helpresolve some of these problems Manywebshybased services are built to be integratshyed into existing business processes

Donrsquot do it yourselfWhat eect will all this have on the natureof the rm If IT systems really allow comshypanies to become more modular and exshyible this should foster further specialisashytion It will become even easier tooutsource business processes or at leastthose parts of them where rms do not enshyjoy a competitive advantage Companieswill increasingly focus on their core andshed the context in the words of Geofshyfrey Moore managing director of TCG Adshy

visors a consultancyThis also means that companies will

rely more on services provided by othersThey will increasingly form process netshyworks a term for loosely connectedgroupings of specialised rms coined byJohn Hagel a business strategist at Deloitteamp Touche an auditing rm His prime exshyample is Li amp Fung a company based inHong Kong that has assembled a globalprocess network of nearly 10000 businesspartners in the clothing industry fromwhich it puts together customised supplychains for clothes designers

Both trends could mean that in futurehuge cloudswhich might be called inshydustry operating systemswill providebasic services for a particular sector for inshystance nance or logistics On top of thesesystems will sit many specialised and inshyterconnected rms just like applicationson a computing platform Yet this is onlyhalf the story The cloud changes not onlythe plumbing and structure of rms andindustries known as the transactionallayer but also their interactional layera term coined by Andy Mulholland chieftechnologist of Capgemini a consultancyHe denes this as the environment whereall the interactions between people takeplace both within an organisation andwith its business partners

Despite all the technology that has enshy

The Economist October 25th 2008 A special report on corporate IT 13

2

1

READERS may be excused if they havenever heard of Kinakuta It is a tiny isshy

land dreamed up by Neal Stephenson inhis novel Cryptonomicon In the scishyenceshyction classic libertarian technoloshygists and entrepreneurs try to turn it into adata haven for such things as anonymousonline banking and electronic money

Reality has indeed caught up with fanshytasy Iceland is about to become a Kinakuta

of sorts Data Islandia a local company istrying to establish the island as a vault for agrowing pile of data that rms must retainin order to comply with all kinds of regulashytions It has a compelling pitch With itscool climate abundant geothermal energyand secure remoteness Iceland appears tobe a prime location for data archives

As often however truth is strangerthan ction In a way Data Islandia is erectshy

ing borders in the cloud it intends to storeEuropean data according to European regshyulation and American bits according toAmerican rules What is more to keep thedata safe during transport they are pickedup with a data scooter (in essence a conshytainer lled with disk drives) and taken toIceland by aeroplaneas though breshyopshytic links had never been invented

This illustrates the political tensions

Computers without borders

The cloud may be the ultimate form of globalisation

tered the workplace in recent years so farthis layer has not really changed PCs cershytainly made people more productive butmost of their programs were not designedfor collaboration The enterprise applicashytions they worked with were still centralshyised systems And eshymail has in some waysmade things worse as the ood of messhysages takes up lots of time and attention

The dominant model is still that peoplerst labour individually and then mergetheir respective eorts says Mr Mulholshyland Itrsquos not much dierent from the ageof paper he writes in his book Mesh Colshylaboration Collaboration often meanspulling up your chair next to your colshyleague so you can look at the same screen

Consumers have pulled ahead of comshypanies in using cloudshybased services thatallow for better collaboration such asblogs wikis and social networks The rstgeneration of people that has grown up usshying all these tools is now entering theworkforce Being used to a culture of sharshying information freely these digital nashytives will be impatient with the rules oftraditional corporate IT

So it is helpful that rms have at last beshygun to embrace Web 20 technologies inearnest a trend predictably called Entershyprise 20 By 2013 companies around theglobe will spend $46 billion on such toolsaccording to Forrester Research What noshybody knows is how rms will trade o theadvantages of letting employees collaboshyrate with the outside world against the asshysociated risks for instance that condenshytial information is leaked Because of suchsecurity concerns (see chart 8) many rmsblock access to such sites as Facebook oncompany computers

Companies may not have much choicebut to open up says Mr Mulholland Emshy

ployees will increasingly resist constraintson their use of technology and they willhave a growing need to reach beyond thecorporate rewall Twenty years ago he arshygues 80 of the knowledge that workersrequired to do their jobs resided withintheir company Now it is only 20 becausethe world is changing ever faster We needto be open to new and unknown connecshytions with people and content he says

Exploiting the mesh in the words ofMr Mulholland will also mean that emshyployees may build simple applications oftheir own that allow them quickly to autoshymate repeat tasks using internal and extershynal IT services A new product by SerenaSoftware called Mashup Composer gives aforetaste of things to come Using a visualinterface even the not so technically mindshyed can quickly put together a service todeal say with travel requests or approvedocuments

Yet the impact of the cloud will also befelt on a macroeconomic level Just as itmakes small rms more competitive itwill help developing economies to move

ahead The biggest promise is that it willmake computing cheaper and easier touseand thus allow it to penetrate newmarkets says Russ Daniels chief technolshyogy ocer for HPrsquos cloudshyservices strategy

Hop skip and jumpThe mobile phone has already enabled deshyveloping countries to skip xedshyline netshyworks Cloud computing could prove to bea similar leapfrog technology because itdispenses with the need to build a cumbershysome IT infrastructure Software developshyers from a developing country can buildjust as great an application on our platformas somebody who lives in Palo Alto saysMr Benio of Salesforce

Indeed countries such as India will cershytainly take a big chunk of the global marketfor cloud services Zoho a popular suite ofwebshybased applications is operated by anIndian company AdventNet Indian hospishytals are already oering specialised healthshycare services this way The insurance armof ICICI an Indian bank has used thetechnology to come up with innovativeservices such as a personalised insurancefor diabetes Premiums are adjusted deshypending on how well policyholders stickto a tness plan All this suggests that theeconomic impact of the cloud may be feltnot only in the IT industry itself but in othshyer sectors too The internet disrupted themusic business Google disrupted the meshydia cloudshybased companies could becomedisrupters in other inecient industriesBuzzwords such as Health Care 20Banking 20 or even Education 20could soon acquire real meaning

But given that the cloud is global by nashyture how might it be regulated The conshyclusion of this special report will oersome answers 7

8Dangers within

Source Forrester

Research

How IT organisations feel about risk ofemployee-driven unsanctioned use of Web 20June 2008

Survey of 242 US IT decision-makers

at companies with 500+ employees

0 10 20 30 40 50

Very concerned

Somewhat concerned

Somewhat unconcerned

Completely unconcerned

14 A special report on corporate IT The Economist October 25th 2008

2

Previous special reports and a list offorthcoming ones can be found online

wwweconomistcomspecialreports

Future special reportsCountries and regionsSpain November 8thRussia November 29thIndia December 13th

Business nance economics and ideasCars in the developing world November 15th The sea January 3rd 2009The future of nance Jan 31st 2009

wwweconomistcomrights

Oer to readersReprints of this special report are available at aprice of pound350 plus postage and packing A minimum order of ve copies is required

Corporate oerCustomisation options on corporate orders of 100or more are available Please contact us to discussyour requirements

Send all orders to

The Rights and Syndication Department26 Red Lion SquareLondon WC1R 4HQ

Tel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492eshymail rightseconomistcom

For more information and to order special reportsand reprints online please visit our website

that will arise with the cloud In one way itis the ultimate form of globalisation vastvirtualised computer systems and elecshytronic services know no borders Yet govshyernments are likely to go to great lengths toavoid losing even more control

When the internet went mainstream inthe late 1990s libertarian thinkers arguedthat cyberspace was a distinct place callingfor laws and legal institutions of its ownAfter all they said it was built in such away that it interprets censorship as damshyage and routes around it But many govshyernments quickly found ways to blockcontent they deemed oensive Just look atChina and its great rewall

Controlling where data are stored andhow they are treated is harder though beshycause information can oat freely in thecloud And it is not just undemocratic govshyernments that want to control their citishyzensrsquo and companiesrsquo data indeed thereare nearly as many sets of data regulationas there are countries If we wanted to beon the safe side in terms of regulation weprobably would need 95 individual datacentres says Chuck Hollis a technologistat EMC the leading maker of storage gearwhich owns Mozy a cloud service that alshylows users to back up their data

There are technological xes to this proshyblem too Customers of Amazonrsquos storageservice for instance can have their datakept either in an American or a Europeandata centre In future cloud providers willoer many more options for where dataare kept and how they are protected Itseems possible that data as well as content

will eventually travel with security locashytion and expiry policies attached

It is when computers become virtualmachines that things get really trickyThese days IT systems are at the core ofmany companiesand just like data thesesystems can now live in a variety of placesWhat happens if they start to migrate toanother country where power is cheaperor regulation laxer Similarly if servicesare a combination of elements provided indierent jurisdictions who is liable ifsomething goes wrong

The cloudrsquos potential political and soshycial eect is only now entering the publicdebate IT rms are putting it on the agendaon both sides of the Atlantic In midshySepshytember for instance Google organised adiscussion on the subject in WashingtonDC A few days later SAP presented a whitepaper in Brussels pointing out that policyshymakers are not aware of the dramatic ecoshynomic impact of the Future Internet asthe paper calls the cloud

IT industry leaders note that ocialsfrom many countries have begun to takean interest in the cloud Some just wantdata centres to be built in their country tocreate jobs others are concerned about isshysues of law enforcement and jurisdictionThe danger they say is that cloud providshyers might be obliged to build more datacentres than are needed and have to comshyply with many dierent regulatory reshygimes Some of them have been oatingthe idea of freeshytrade zones for data censhytres where common rules would apply

Yet such ideas appear at odds with anshyother big question that could keep thecloud from growing how to protect prishyvacy Consumers expect their informashy

tion will be treated the same way on thecloud as if it were stored at home on theirown computers says Ari Schwartz of theCenter for Democracy and Technology anadvocacy group Many of the devices thatfeed into it such as sensors and cameraswill be intrusive For example Googlersquosvans go round taking streetshybyshystreet picshytures of cities for the companyrsquos onlinemap service called Streetview The picshytures are meant to help people nd theirway around but also often show passshyersshyby in embarrassing situations To proshytect their identity Google now blurs theirfaces and licence plates

Hands o my dataBut it is not only personal information thatcould get out into the open Privacy is aworry for companies tooand not just beshycause criminals or spies might intercepttheir data Once they are in the cloud govshyernments can also get their hands on themmore easily SWIFT the organisation thatmanages international bank transfers isplanning to build a data centre in neutralSwitzerland That will allow it to keep dataabout European transfers on the old contishynent where it cannot be subpoenaed bythe American government Webshybased eshymail is not safe either Thanks to the StoredCommunications Act American law enshyforcers can read peoplersquos messagesanddo not even have to tell the recipient

Just as too much regulation may keepthe cloud from rising high so could lack ofprivacy If consumers and companies canshynot be sure that their information is safethey will err on the side of caution But deshyspite all the caveats the precipitation fromthe cloud will be huge 7

The Economist October 25th 2008 A special report on corporate IT 3

1

IT IS almost as easy as plugging in a laserprinter Up to 2500 serversin essence

soupedshyup personal computersarecrammed into a 40shyfoot (13shymetre) shippingcontainer A truck places the container inshyside a bare steelshyandshyconcrete buildingWorkers quickly connect it to the electricgrid the computer network and a watersupply for cooling The necessary softwareis downloaded automatically Within fourdays all the servers are ready to dish upvideos send eshymails or crunch a rmrsquos cusshytomer data

This is Microsoftrsquos new data centre inNorthlake a suburb of Chicago one of theworldrsquos most modern biggest and most exshypensive covering 500000 square feet(46000 square metres) and costing$500m One day it will hold 400000 servshyers The entire rst oor will be lled with200 containers like this one Michael Mashynos the head of Microsoftrsquos data centres isreally excited about these containers Theysolve many of the problems that tend tocrop up when putting up huge data censhytres how to package and transport serverscheaply how to limit their appetite for enshyergy and how to install them only whenthey are needed to avoid leaving expenshysive assets idle

But containers are not the only innovashytion of which Mr Manos is proud Microshysoftrsquos data centres in Chicago and acrossthe world are equipped with software thattells him exactly how much power eachapplication consumes and how much carshybon it emits Wersquore building a global inforshymation utility he says

Engineers must have spoken with simishylar passion when the rst moving assemshybly lines were installed in car factories alshymost a century ago and Microsoftrsquos datacentre in Northlake just like Henry Fordrsquosrst large factory in Highland Park Michishygan may one day be seen as a symbol of anew industrial era

Before Ford revolutionised carmakingautomobiles were put together by teams ofhighly skilled craftsmen in customshybuiltworkshops Similarly most corporate datacentres today house armies of systemsadministrators the craftsmen of the inforshymation age There are an estimated 7000such data centres in America alone most

of them oneshyo designs that have grownover the years reecting the history ofboth technology and the particular use towhich it is being put It is no surprise thatthey are egregiously inecient On avershyage only 6 of server capacity is used acshycording to a study by McKinsey a consulshytancy and the Uptime Institute athinkshytank Nearly 30 are no longer in useat all but no one has bothered to removethem Often nobody knows which applishycation is running on which server A wideshyly used method to nd out is Letrsquos pull theplug and see who calls

Limited technology and misplaced inshycentives are to blame Windows the mostpervasive operating system used in datacentres allows only one application to runon any one server because otherwise itmight crash So IT departments just keptadding machines when new applicationswere needed leading to a conditionknown as server sprawl (see chart 3)This made sense at the time servers werecheap and evershyrising electricity bills weregenerally charged to a companyrsquos facilitiesbudget rather than to IT

To understand the technology neededto industrialise data centres it helps to lookat the history of electricity It was only afterthe widespread deployment of the rotaryconverter a device that transforms onekind of current into another that dierentpower plants and generators could be asshysembled into a universal grid Similarly atechnology called virtualisation now alshylows physically separate computer sysshytems to act as one

Virtually newThe origins of virtualisation go back to the1960s when IBM developed the technolshyogy so that its customers could make betteruse of their mainframes Yet it lingered inobscurity until VMware now one of theworldrsquos biggest software rms applied it tothe commodity computers in todayrsquos datacentres It did that by developing a smallprogram called hypervisor a sort of elecshytronic trac cop that controls access to acomputerrsquos processor and memory It alshylows servers to be split into several virtualmachines each of which can run its ownoperating system and application

In a way wersquore cleaning up Microsoftrsquossins says Paul Maritz VMwarersquos boss anda Microsoft veteran and in doing so wersquoreseparating the computing workload fromthe hardware Once computers have beshycome more or less disembodied all sortsof possibilities open up Virtual machinescan be red up in minutes They can bemoved around while running perhaps toconcentrate them on one server to save enshyergy They can have an identical twinwhich takes over should the original failAnd they can be sold prepackaged as virshytual appliances

VMware and its competitors whichnow include Microsoft hope eventually toturn a data centreor even several oftheminto a single pool of computingstorage and networking resources that canbe allocated as needed Such a realshytimeinfrastructure as Thomas Bittman ofGartner calls it is still years o But the necshyessary software is starting to become availshyable In September for instance VMwarelaunched a new virtual datashycentre opershyating system

Perhaps surprisingly it is Amazon a bigonline retailer that shows where things areheading In 2006 it started oering a comshyputing utility called Amazon Web Services(AWS) Anybody with a credit card canstart say a virtual machine on Amazonrsquosvast computer system to run an applicashytion such as a webshybased service Develshyopers can quickly add extra machines

Where the cloud meets the ground

Data centres are quickly evolving into service factories

3Voracious

Source IDC

Worldwide spending $bn on

FORECAST

0

50

100

150

200

250

0

10

20

30

40

50

1996 98 2000 02 04 06 08 11

New servers

Server management and administration

Power and cooling Serversinstalledbase m

4 A special report on corporate IT The Economist October 25th 2008

2 when needed and shut them down if thereis no demand (which is why the utility iscalled Elastic Computing Cloud or EC2)And the service is cheap a virtual machshyine for instance starts at 10 cents per hour

If Amazon has become a cloudshycomshyputing pioneer it is because it sees itself asa technology company As it branched outinto more and more retail categories it hadto develop a sophisticated computing platshyform which it is now oering as a servicefor a fee Of course this has nothing to dowith selling books says Adam Selipsky incharge of product management at AWSbut it has a lot to do with the same techshynology we are using to sell books

Yet Amazon is not the only big onlinecompany to oer the use of industrialshyscale data centres Google is said to be opshyerating a global network of about threedozen data centres loaded with more than2m servers (although it will not conrmthis) Microsoft is investing billions andadding up to 35000 servers a month Othshyer internet giants such as Yahoo are alsobusy building huge server farms

In some places this has led to a veritabledatashycentre construction boom Half a dozshyen are being built in Quincy a hamlet inthe middle of Americarsquos Washington stateclose to the Columbia River The attractionis that its dams produce plenty of lowshycostpower which apart from IT gear is themain input for these computing farms Onaverage cooling takes as much power ascomputing Microsoftrsquos new data centrenear Chicago for instance has three subshystations with a total capacity of 198MW asmuch as a small aluminium smelter

But cheap electricity is only one albeitimportant criterion for choosing the site ofa data centre Microsoft currently feeds 35sets of data into an electronic map of theworld including internet connectivity theavailability of IT workers even the airquality (dry air makes a good coolant) tosee where conditions are favourable andwhich places should be avoided Apparshyently Siberia comes out well

Google for its part seems to be thinkshying of moving oshore In August it apshyplied for a patent for watershybased data censhytres Computing centres are located on aship or ships anchored in a water bodyfrom which energy from natural motion ofthe water may be captured and turnedinto electricity andor pumping power forcooling pumps to carry heat away saysthe patent application

Many chief information ocers wouldlove to take their IT infrastructure out tosea and perhaps drown it there Even as deshy

mand for corporate computing continuesto increase IT budgets are being cut At thesame time many rmsrsquo existing IT infrashystructure is bursting at the seams Accordshying to IDC a marketshyresearch rm a quarshyter of corporate data centres in Americahave run out of space for more servers Forothers cooling has become a big constraintAnd often utilities cannot provide the extrapower needed for an expansion

Fewer bigger betterSo IDC thinks that many data centres willbe consolidated and given a big makeoverThe industry itself is taking the lead For exshyample HewlettshyPackard (HP) used to have85 data centres with 19000 IT workersworldwide but expects to cut this down tosix facilities in America with just 8000employees by the end of this year reducshying its IT budget from 4 to 2 of revenue

Other large organisations are followingsuit Using VMwarersquos software BT a teleshycoms rm has cut the number of servers in

its 57 data centres across the world from16000 to 10000 yet increased their workshyload The US Marine Corps is reducing thenumber of its IT sites from 175 to about 100Both organisations are also starting tobuild internal clouds so they can move apshyplications around Ever more rms are exshypected to start building similar inshyhouse orprivate clouds The current economicmalaise may speed up this trend as compashynies strive to become more ecient

But to what extent will companies outshysource their computing to public cloudssuch as Amazonrsquos James Staten of Forresshyter Research a marketshyresearch rm saysthe economics are compelling particularlyfor smaller rms Cloud providers he sayshave more expertise in running data censhytres and benet from a larger infrastrucshyture Yet many rms will not let companydata oat around in a public cloud wherethey could end up in the wrong hands Theconclusion of this report will consider thequestion of security in more detail

It does not help that Amazon and Gooshygle recently made headlines with serviceinterruptions Few cloud providers todayoer any assurances on things like conshytinuity of service or security (called sershyviceshylevel agreements or SLAs) or take onliability to back them up

As a result says Mr Staten cloud comshyputing has not yet moved much beyondthe earlyshyadopter phase meaning thatonly a few of the bigger companies are usshying it and then only for projects that do notcritically aect their business The Washshyington Post for instance used AmazonrsquosAWS to turn Hillary Clintonrsquos WhiteHouse schedule during her husbandrsquostime in oce with more than 17000 pagesinto a searchable database within 24hours NASDAQ uses it to power its serviceproviding historical stockmarket informashytion called Market Replay

Stefan van Overtveldt the man incharge of transforming BTrsquos IT infrastrucshyture thinks that to attract more customersservice providers will have to oer virtualprivate clouds fenced o within a publiccloud BT plans to oer these as a servicefor rms that quickly need extra capacity

So there will be not just one cloud but anumber of dierent sorts private ones andpublic ones which themselves will divideinto generalshypurpose and specialised onesCisco a leading maker of networking gearis already talking of an intercloud a fedshyeration of all kinds of clouds in the sameway that the internet is a network of netshyworks And all of those clouds will be fullof applications and services 7

The Economist October 25th 2008 A special report on corporate IT 5

1

WANT to become a programmer in 20minutes With the program from Iceshy

berg a startshyup you can Just open the getshyting started wizard and pick the type ofapplication say project managementType in its business objectsthings likeclient team and membersand tellthe tool how they relate to each otherThen design some input forms and denethe process for getting a project done Anshyother click and you are ready to go

In reality of course things are not thatsimple And many professional programshymers will sco at the development tool asa mere toy Yet Iceberg and similar outtsdemonstrate that geeks are losing their moshynopoly on programming Now with a bitof patience anybody can create a simpleapplication for instance to collaboratewith colleagues or to draw an online map

This democratisation of programminghowever is only a small part of somethingmuch deeper a fundamental change in thenature of software It is not just that moreand more software will become a servicedelivered online More importantly applishycations webshybased or not will no longercome as a big chunk of software but willbe made up of a combination of electronicservicesa shift that has picked up a lot ofspeed since computing began moving intothe cloud

To understand this new way of buildshying applications known as serviceshyorishyented architecture (SOA) think of a culishynary analogy Whereas the old chunk ofsoftware resembles a precooked meal thatjust has to be popped into the oven thenew architecture is more like a restaurantIt is a service in itself but also a combinashytion of subshyservices There is the waiter

who takes the order and conveys it to thekitchen There is the cook who preparesthe food And there are the cleaners whokeep the place tidy Together they create theapplication a restaurant

An attack of the vapoursThe importance of this shift from a monoshylithic product to services is hard to overshystate In a sense it has seeded the cloud alshylowing the dropletsthe services thatmake up the electronic vapourto form Itwill allow computing to expand in all dishyrections and serve ever more users Thenew architecture also helps the less technishycally minded to shape their own cloudsusing such tools as Icebergrsquos

Just as for the industrialisation of datacentres there is a historic precedent for thisshift in architecture the invention of movshyable type in the 15th century At the timeprinting itself was not a new idea But itwas Gutenberg and his collaborators whothought up the technologies needed tomake printing available on a mass scalecreating letters made of metal that could bequickly assembled and reshyused

Similarly the concept of modularityhas been around since the early days ofcomputing Everything in computer scishyence is to just write less code What is thetechnique for writing less code Itrsquos calledsubroutines said Bill Gates Microsoftrsquosfounder in a recent interview A subroushytine is a part of a program that can be reshyused just like movable type The idea saysMr Gates has always been to apply thisprinciple of a subroutine more broadly

Yet this did not happen mainly beshycause the cost of computing fell much fastshyer than that of communications Ever

cheaper and more powerful chips made itpossible to move from mainframes tominicomputers to personal computers(PCs) and now to handshyheld devices Butconnecting all these pieces remained dishycult and expensive which meant that suchdevices all had to come with their owndata and chunky programs Now thanks toplenty of cheap bandwidth and more andmore wireless connectivity computing isable to regroup into specialised services orMr Gatesrsquos subroutines We now live in aworld whereeth[a] subroutine can exist onanother computer across the internet

Part of Gutenbergrsquos genius was to recogshynise the need for all the letters to be identishycal in height so they could be easily comshybined Similarly for computing services towork there had to be robust technical stanshydards Only a few years ago this seemed farbeyond the IT industryrsquos reach Most rmsinsisted on their proprietary technologymostly to lock in their customers Againcheaper communications helped to bringabout change The success of the internetdemonstrated the huge benets of openstandards and forced vendors to agree oncommon ways for their wares to work toshygether One result is a stack of somethingcalled webshyservices standards

Serviceshyoriented architecture rstshowed up in openshysource software butwas quickly adopted by big enterpriseshysoftware vendors because they had apressing need for it says Jim Shepherd ofAMR Research a consultancy Big softwarevendors for instance had to nd a way tountangle the hairball of code that their proshyducts had become or else they themselveswould choke on it Customers wantedmore exible and extensible programs

Creating the cumulus

Software will be transformed into a combination of services

6 A special report on corporate IT The Economist October 25th 2008

2 Think back to the gastronomic examshyple A precooked meal is hard to changeand so are traditional software applicashytions By contrast a restaurant can easilychange its menu and its style of operationSimilarly SOAshybased software allowscompanies to alter their business processshyes such as the way they handle orders tocollect cash

SAP a German software rm was oneof the rst companies to put this serviceshyoriented architecture front and centreStarting in 2003 it developed among othshyer things a new corporateshysoftware packshyage that did away with monolithic applicashytions such as programs to keep track of acompanyrsquos nances or manage its relationshyship with customers Instead it introduceda collection of reshyusable components thatcould be strung together at will

IBM too is a fan of SOA and web sershyvices But its approach is somewhat diershyent given that it does not sell business apshyplications but makes most of its moneyfrom IT services and software to managethe underlying computing infrastructureIBM uses SOA mainly to help rms inteshygrate their increasingly complex and dispashyrate IT systems Its software turns theminto a collection of services that can bewoven into business processes

The approaches may be dierent butthe vision is the same to create IT systemsthat adapt to the business needs of compashynies and allow them to connect When Iwant to do something new explainsSteve Mills the boss of IBMrsquos softwaregroup I do not need to build a new applishycation but can use the pieces I alreadyhave To Peter Zencke who led the develshyopment of SAPrsquos new package its most exshyciting feature is that any of the processcomponents can now become a serviceprovided by some other rm

Despite millions of dollars spent onmarketing SOA it has not really taken oyet But many webshybased applications forconsumers rely on this concept The primeexample is Google Maps When the onlinegiant launched the service programmersquickly gured out how to mix the mapswith other sources of information This ishow for example Housingmapscom wascreated a combination of a Google mapwith the rental and sales listings fromCraigslist a website for classied ads Itwas one of the rst mashshyups as suchcombinations have come to be called

Since then the number of such mashshyups has exploded thanks mainly to sershyvices like Microsoftrsquos Popy and YahooPipes In essence these are graphical proshy

gramming tools Users drag and dropmodulesdata feeds providing such inshyformation as pictures headlines andsearch resultsand weave them together

Most of these mashshyups are still toysbut rms oering software as a servicehave started oering similar combinashytions In April Salesforcecom and Googleannounced that they would integrate theironline services Users of Salesforce whichhelps rms manage their customer relashytionships can now quickly switch to Gooshyglersquos webshybased applications

Smaller rms have already started toweave a network of services OpSource aSilicon Valley startshyup for instance proshyvides basic services for other SaaS rmsand web companies TriCipher anotherCalifornian newcomer authenticates usshyers of web applications Ribbit for its partallows these services to add voice commushynications to their oerings

Yet it is unlikely that the software cloudwill end up as a vast nebula of thousandsof specialised services Even creating a sershyviceshyoriented architecture is no silver bulshylet against complexity in a famous phraseby Frederick Brooks an elder of computerscience Although web services allow onshyline oerings to connect for instance it iscostly to synchronise their data And itwould not make sense for any rm to betits business on simple mashshyups

As software markets mature they tendto form two kinds of clumps integratedsuites of applications and platforms ontop of which others can build programsBoth forms are already emerging On theapplications side there is Google Apps and

Zoho which is even more comprehensiveIt encompasses a total of 18 applicationsincluding word processing project manshyagement and customershyrelationship manshyagement (CRM)

As for platforms there are already plenshyty in dierent shapes and sizes For entershyprise applications SAP has built one calledNetweaver Oracle oers something simishylar called Fusion Last year Salesforcelaunched a platform as a service allowshying other rms to use the plumbing thatsupports its own CRM oering

More recently platforms for consumerservices have been proliferating Faceshybook a social network was the rst to beshycome one in 2007 Other big online rmshave followed suit or will do so soon Gooshygle with App Engine Yahoo with YOSand Microsoft with a cloud operating sysshytem thought to be called Windows StrataSome predict a platform war to rival theepic ghts between Microsoftrsquos Windowsand Applersquos Macintosh

Never say dieWhat shape will the software cloud takeother than being a vast collection of sershyvices In one way it will look much like theold software world There will be a few bigplatforms akin to todayrsquos operating sysshytems and most applications will be writshyten to one of these platforms

What is less clear is just how much ofbusiness and consumer software will mishygrate into the cloud and how fast The anshyswer depends on whom you ask Unsurshyprisingly Marc Benio Salesforcersquosfounder and chief executive argues thatweb applications will spell the death ofsoftware But people are not about tothrow out their powerful PCs or other clishyent devices if only because many ofthem still work oine at times Similarlycompanies will always want to keep someapplications inshyhouse for reasons of secushyrity regulation or simply to maintain conshytrol Ray Ozzie Microsoftrsquos chief softwarearchitect promotes something calledsoftware plus services meaning thatcustomers will settle on the right mix ofold and new stu

If history is any guide Mr Ozzie is moreon the mark Even the biggest changes in IThave never spelt the death of anythingnotes Josh Greenbaum of Enterprise Apshyplications Consulting IBM for instance isstill making money with mainframes

So the software cloud just like its hardshyware underpinnings will be very diverseBut how will people make use of this kindof computing 7

4Looming ever larger

Source Gartner

Within the enterprise application

markets daggerEstimate

Worldwide software-as-a-service revenue $bn

2005 06 07dagger 08 09 10 110

2

4

6

8

10

12

200

159

90

259

957

Compound annual growthrate 2006-2011

291

Content communications and collaborations

Enterprise-resource planning

Supply-chain management

Customer-relationship management

Office suites and digital-content creation

Others

F O R E C A S T

The Economist October 25th 2008 A special report on corporate IT 7

1

IT WILL take something with a lot morebang to replace a medium that is thoushy

sands of years old That was the prevailingreaction when Amazon last November anshynounced the launch of Kindle an electronshyic book reader the size of a paperback thatcan store more than 200 volumes Yet bythe end of this year Amazon will have soldnearly 380000 Kindles says Mark Mahashyney an analyst with Citigroup a bankTurns out the Kindle is becoming the iPodof the book world he recently wrote in anote to clients in a reference to Applersquosiconic music player

It is certainly not the Kindlersquos looks thatexplain its success Compared with theiPod its design looks very last centurySoftware and battery life too leave a lot tobe desired The chief attraction of the deshyvice is the ease with which it can be used tobuy books and other content Equippedwith a mobileshyphone modem the Kindlecan simply pull new reading material outof the air Users do not even have to have awireless service contract Our vision is tohave every book that has ever been inprint available in less than 60 seconds exshyplains Je Bezos Amazonrsquos boss

It remains to be seen whether the Kinshydle will become a cultural phenomenonlike the iPod of which around 160m havebeen sold so far Amazon for its part isdownplaying the Kindlersquos success and willnot conrm any sales estimates But it issafe to say that once the next generation ofwireless networks is up and running hunshydreds of millions of devices will come likethe Kindle with builtshyin radio connectivity(see chart 5) Digital cameras will automatishycally upload pictures Smart meters willsend readings of how much electricity ahouse consumes All kinds of sensors willbe able to send messages even things likedipsticks when tanks of liquid are low

The relationship of these devices tocloud computing may not be obvious Butif huge data centres and applications makeup the cloud itself then all the hardwareand software through which it connectsand communicates with the real world areits periphery In IT speak this is known asthe front end or client side

As the Kindle and other examplesshow this layer does not have much to do

with the user interface or client device ofold It will do a lot of computing itself Itwill come in all shapes and sizes dependshying on what the user wants to do And itwill not just distribute information as theweb does but collect it as well The analoshygy that springs to mind here is a theatreperformance with audience participationthe electronic cloud will adapt to whateverit engulfs

As you like itJust like computing itself the dominantuser interface has evolved continually Inthe days of the mainframe when computshyers and their peripherals lled entirerooms people communicated with thesemachines rst via punch cards and thenvia greenshyglowing monitors which weresimply dumb terminals Only with the riseof personal computers did the user intershyface become more intelligent responsiveand graphical

The rst version of the web was thus abrief step backward To be sure browsersbrought colour and graphics to the hithershyto textshybased internet but they were asdumb as the mainframe terminal This haschanged only in recent years A bundle ofwebshydevelopment techniques dubbedAJAX and multimedia software such asAdobersquos Flash and Microsoftrsquos Silverlightnow allow programmers to write what arecalled rich internet applications (RIA)

Whatever the buzzword the principleis much the same Servers no longer dishup simple hypertext markup language(HTML) the webrsquos early lingua franca Inshycreasingly web pages are bona de piecesof software that are executed in the browsshyer Users of Web 20 sites who venture intomenu items such as view source in theirbrowsers can sometimes see thousands oflines of code

In recent months the browser has beshycome even more of a platform for otherprograms akin to an operating systemsuch as Windows The main driver of thistrend is Google with its huge strength indistribution that can only gain from moreand more software being oered as a sershyvice In May 2007 the Silicon Valley rmlaunched Gears a program that allowsweb applications to be used oine and inSeptember this year it released a newbrowser called Chrome Its most imporshytant feature is that it can execute several soshyphisticated web applications at once

Although for now the internet browserwill remain the main vehicle for people tointeract with the cloud other forms arecoming to the fore One is the widget asnippet of code that often lives on a PCrsquosdesktop and allows the user to get a quickpersonalised view of a set of data The ideais that a salesperson for instance shouldnot have to re up an entire application forcustomershyrelationship management tond out which leads to follow up

More importantly there is now a greatshyer variety of hardware through which toaccess the cloud Already desktop and lapshytop computers are starting to lose their moshynopoly for surng the web as smaller deshyvices such as smart mobile phones andvarious forms of portable computers startto compete with them

Asus a Taiwanese computershymakerstarted the trend when it launched a smallcheap laptop called Eee a year ago Nowthere are dozens of these devices Gartnerreckons that 52m of these minishynoteshybooks will be sold this year 8m next andas many as 50m in 2012

Perhaps the best indicator of things tocome is Intel a huge chipmaker It made afortune selling processors for servers pershysonal computers and laptops In June the

On the periphery

The cloudrsquos communications with its clients will become ever more intelligent and interactive

5Chatterboxes

Source iSuppli

Worldwide shipments of electronic productswith built-in wireless capability bn

2003 04 05 06 07 08 09 10 11 120

05

10

15

20

25

30

Local-area

Products with embedded wireless networking

Wide-areaTotal cellularhandsets

F O R E C A S T

8 A special report on corporate IT The Economist October 25th 2008

2 rm launched a new line of chips calledAtom designed to power what it calls netshybooks and mobile internet devices(MIDs) mainly intended for surng theweb Intel is also the driving force behindWiMAX a technology for wireless broadshyband access to the internet It wants to puta WiMAX radio chip into as many devicesas possible from portable computers tospecialised gadgets such as the Kindle

Applersquos iPhone and its App Storewhich allows iPhone and iPod owners todownload applications also provide aforetaste of how important wireless deshyvices will be for the cloud Apple launchedApp Store only in July Two months later ithad already tallied 100m downloadsmeaning that it took o much faster thanApplersquos highly successful iTunes musicstore Many of the programs on oer conshynect to the cloud including news feedsmultishyplayer games and a service thatkeeps track of the latest polls for Americarsquospresidential election

You can take it with youThe plethora of devices wirelessly conshynected to the internet will speed up a shiftthat is already under way from a deviceshycentric to an informationshycentric worldin the words of VMwarersquos Paul Maritz Upin the cloud there will be a body of data foreach individual that will accompany themthrough life he explains and it will not betied to any particular device as it is today

Again what will make this possible is

virtualisationthis time of client devicesnot servers With the help of software fromVMware and others some rms have alshyready virtualised their employeesrsquo desktopcomputers which allows them to be manshyaged centrally Operating systems and apshyplications will no longer run only on theemployeersquos PC but on a virtual machine ina data centre that can be accessed remotelytheoretically from any PC in the worldSooner or later mobile devices will also beshycome virtualised Users will be able to usetheir applications and data on whichevergadget they have at hand

Yet the cloudrsquos interface is designed notmerely to provide information but to gathshyer it as well The future belongs to servicesthat respond in real time to informationprovided either by their users or by nonshyhuman sensors predicts Tim OrsquoReilly thefounder of OrsquoReilly Media a publisher oftechnology books who coined the termWeb 20 Such live applications hesays will get better the more data they areable to collectand there will be plenty asthe cloud expands

One of the rst examples of such a sershyvice was Google What originally put thesearch service ahead of the competitionwhen it was launched a decade ago was itsway of harvesting the information providshyed by web users in linking to other sitesthe more links point to a page the moreuseful it must be These days most links aregenerated by computers so the originalform of this page rank algorithm has

long since been scrapped But Googlersquos apshyproach is still the same mining informashytion provided by web users such as theirsearch histories to provide more relevantsearch results and more eective and tarshygeted advertising

The direct link to users also allows rmssuch as Google continuously to improvetheir interface something traditional softshywareshymakers were not able to do At anygiven time Google is running dozens oftests to optimise the look and feel of its ofshyferings This makes web applications farless technologyshydriven and much moreusershyoriented says IBMrsquos Mr WladawskyshyBerger They are much more inspired bywhat goes on in the real world

A raft of startshyups is also trying to builda business by observing its users in eectturning them into human sensors One isWesabe (in which Mr OrsquoReilly has investshyed) At rst sight it looks much like any pershysonalshynance site that allows users to seetheir bank account and creditshycard inforshymation in one place But behind the scenesthe service is also sifting through its memshybersrsquo anonymised data to nd patterns andto oer recommendations for future transshyactions based for instance on how much aparticular customer regularly spends in asupermarket Wireless devices too will inshycreasingly become sensors that feed intothe cloud and adapt to new information

Nokia for its part is planning to buildall kinds of sensors into mobile phones tomonitor things like movement barometricpressure or even the ownerrsquos healthwhich many experts expect to become abig new trend Sensors could also be usedto record peoplersquos activities creating whatsome already term a lifelograising allkinds of privacy concerns

As wireless technology gets better andcheaper more and more dierent kinds ofobjects will connect directly to the cloudSAP the German softwareshymaker haslaunched a research project called The Inshyternet of Things to see what can be donewith the resulting information As part ofthat project an initiative called the FutureFactory is now under way to investigatehow intelligent tags can make manufacturshying more adaptive and ecient

More and more data get you only so farhowever In the end Googlersquos search reshysults and its textshybased online advertiseshyments are relevant to users only becausethe rm has devised clever ways to siftthrough them says Hal Varian the rmrsquoschief economist The big challenge of thecloud will be to connect the myriad data init and make them protable 7

The Economist October 25th 2008 A special report on corporate IT 9

1

EVEN elephants can die In 1993 extincshytion came close for IBM then the

worldrsquos largest computershymaker (it hassince been overtaken by HP) Its mainshyframe business was collapsing and protswere plummeting At that point LouisGerstner took over as chief executive andmanaged to turn the company aroundOnly a handful of people understandhow precariously close IBM came to runshyning out of cash in 1993 he writes in hismemoir Who Says Elephants CanrsquotDance Whether we would have had tole for bankruptcy I canrsquot say

There are many reasons why IBM nearshyly went bellyshyup not least the fact that BigBlue had become a bureaucratic monsterBut most critically it had failed to adapt tothe industryrsquos rst big platform shiftwhich only really made itself felt in the earshyly 1990s the move from mainframes tosmaller machines rst soshycalled minicomshyputers then personal computers IBMwas slow very slow in delivering distrishybuted computing and many small compashynies moved in to ll the gap Mr Gerstnerwrites

It is unlikely that the move into thecloud will produce a similar nearshydeath exshyperience or even a real casualtyif only beshycause IBM still stands as a warning Butthat does not mean that the structure of theIT industry will remain unchanged northat the economics will stay the sameOnce the IT sky really clouds over individshy

ual rmsrsquo share of the global IT budget (seechart 6) will shift

The move to distributed computingwhich started in the midshy1980s led to a bigchange in the IT industry In the era of themainframe computing came in a verticallyintegrated package mainly from IBM Withdistributed computing the industry beshycame a stack of horizontal layers In corshyporate IT these were mainly hardware thenetwork infrastructure software (such asoperating systems and databases) entershyprise applications and IT services

Not all of these layers were createdequal Computershymakers commanded athicker one for instance but software comshypanies were more protable The key proshygram was the operating system both onservers and on personal computers (clishyents) It was the standard to which othercomponents of IT systems had to conformUsually this was a version of Windowswhich made Microsoft the IBM of this newera of computing

Cloud computing is unlikely to bringabout quite such a dramatic shift In esshysence what it does is take the idea of distrishybuted computing a step farther Still it willadd a couple of layers to the IT stack One ismade up of the cloud providers such asAmazon and Google The other is softwarethat helps rms to turn their IT infrastrucshyture into their own cloud known as a virshytual operating system for data centres

Drawing a neat diagram of the IT stack

will also become increasingly dicult beshycause the layers are becoming less distinctIn a world of services it often does notmake sense to think of hardware and softshyware separately argues Padmasree Warshyrior the chief technology ocer of CiscoBoth need to be blended to oer new sershyvices she says

Mix and matchEven though the IT stack may not changeall that much the perceived value of thedierent layers will shift and with it theamount of prot IT rms can make fromeach of them Who will lose and who willwin depends on how much of computing

Highs and lows

As IT gets cloudier the economics of the business will change

6Follow the money

Source Gartner Forecast

Worldwide end-user spending $trn

2006 07 08 090

1

2

3

4

Computer hardware

Software

IT services

Telecomsequipment

Telecoms services

10 A special report on corporate IT The Economist October 25th 2008

2

1

eventually moves into the cloud In the rst round almost everybody in

the IT industry will do well as the cloudsare being built The biggest winners arelikely to be hardwareshymakers says MarkStahlman of Gartner Hardware alwayswins when new demand for computing isuncovered And we havenrsquot had such asweeping global demand since the 1990s

But in the longer term there will be relashytive winners and losers The hardwarebusiness could actually nd itself in thelosing group Its margins could getsqueezed as cloud computing matures beshycause there will be fewer customers withmore buying power says James Staten ofForrester Research Large cloud providerscan dictate how to build servers and atwhat price he notes

All that may explain why hardwareshymakers were among the rst to jump onthe cloudshycomputing bandwagon So farthey have done only what Mr Staten callscloudshywashing relabelling existing proshyducts that help customers build a moreexible IT infrastructure But they are alsopreparing for a time when more moneycan be made building clouds than buildingcomputers IBM and HP for instance haveteamed up with other rms and universishyties to design new cloud architectures

Which side of the fenceIn the long run says Mr Staten hardwareshymakers may be torn between supplyingcloud providers or becoming providersthemselves Being both will not be easybecause the rms would be competingwith their biggest customers Dell seems tohave decided to be a cloud supplier SunMicrosystems is a candidate to become aprovider it is oering a cloudshylike servicecalled Networkcom albeit not very sucshycessfully HP and IBM already used to thebalancing act of selling hardware and proshyviding IT services will try to do both

Makers of traditional software will ndthe going even tougher With the advent ofopenshysource software in particular Linuxselling operating systems had already beshycome less protable In a virtual worldthey will become even more commodishytised which is bad news for MicrosoftMany business applications no longerneed a big generalshypurpose server operatshying system but can use a specialised onewhich should put pressure on prices Onclient computers more and more applicashytions are written to run in browsers not onany particular operating system

Makers of business applications arealso on the defensive Traditionally they

have made billions by selling their proshygrams often demanding hefty sums to inshystall them and then charging an annualmaintenance fee for upgrades and technishycal support But this highly lucrative busishyness model has come under increasingpressure says Michael Cusumano a proshyfessor at the Massachusetts Institute ofTechnology (MIT)

For one he says software vendors willhave to nd new ways to charge for theirwares in the cloud tying licensing fees tothe number of users for instance will bedicult since services will mostly be conshysumed by other machines More imporshytantly the corporate world has becomeless and less willing to buy software forlarge sums of money so software rms listshyed on Americarsquos stockmarkets now makemost of their prots from maintenanceand other services (see chart 7) SAP will inshycrease its annual maintenance fees to atleast 22 of a programrsquos value over thenext few years in line with those of Oracleits main rival

Yet the biggest challenge for softwarerms is to become providers of online sershyvices themselves says Brent Thill of Citi Inshyvestment Research So far they havemoved slowly oering SaaS only on theside if at all This was partly because theircustomers were not that keen But moreimportantly notes Mr Thill the softwarehouses are still wedded to their old busishyness model With SaaS they do not get a bigupfront payment only subscription fees

Once Salesforce and NetSuite hadshown that the SaaS model works the inshycumbents began to move faster In Septemshyber last year for instance SAP presentedBusiness ByDesign a package of webshybased enterprise applications for smallerbusinesses But success will not come easishyly SAP has slowed down the introductionof the new service because it still needs towork out how to run it cheaply enough tomake a reasonable prot

Pure SaaS providers also have a lot ontheir minds Some experts such as JoshuaGreenbaum of Enterprise ApplicationsConsulting reckon that few will ever be asprotable as traditional software rms Alshythough it is almost a decade old Salesforcestarted making money only in 2006 mainshyly because it rst had to spend heavily onmarketing to attract customers But nowthat the service has 1m users and revenuesof more than $1 billion these costs willcome down says the rm

The companies that have the bestchance of making money from the cloudare those that get things to connect and

work together and help customers movetheir computing around This is music tothe ears of big IT rms not least IBM Nearshyly 80 of its revenues come from infrashystructure software and IT services which itcan oer globally HP is catching up havingtaken over EDS another big ITshyservicesrm Both Microsoft and SAP for their partbelieve that rms will want to have achoice in where to do their computing aswell as the exibility to move thingsaround over time

Two potentially important contestantsare rarely mentioned Cisco and EMC theleading makers of networking and storagegear respectively Having invested a lot insoftware and services Cisco has becomemore than just the source of most of theworldrsquos routers the trac cops of the intershynet It is betting that in the cloud the netshywork layer will become more importantfor instance to ensure that computingworkloads are able to move around seshycurely EMC for its part has made two dozshyen cloudshyrelated investments andlaunched a cloudshyinfrastructure division

Whoever manages to own the domishynant operating system for the data centrecould become a big winner VMware isbound to have a shot at this As well as beshying the market leader in virtualisation ithas the support of EMC which holds 86of the rm But the competition is likely tobe intense

Will this prospective platform war proshyduce a dominant company in the mould ofIBM or Microsoft that is able to extractmore than its fair share of the prots Probshyably not because it will be relatively easyto switch between vendors says GeorgeGilbert of Tech Strategy Partners a consulshytancy Nor is it likely that one rm willmanage to build a global cloud monopolyAlthough there are important economiesof scale in building a network of data censhy

7Serving up a treat

Source Michael Cusumano

Massachusetts Institute of Technology

US-listed software-firmsrsquo sales of total

1990 92 94 96 98 02 042000 06

03

04

05

06

07

Services

Products

The Economist October 25th 2008 A special report on corporate IT 11

2

1

BUSINESSES as well as most organishysations outside the business world

begin to shift from hierarchical processesto networked ones Nearly every facet ofhuman activity is transformed in someway by the emergent fabric of interconnecshytion This reorganisation leads to dramaticimprovements in eciency and producshytivity So said Wired magazine the centralorgan of Web 10 in July 1997 in an essay enshytitled The Long Boom arguing that theworld was in for 25 years of prosperityfreedom and a better environment Backthen the article reected the general optishy

mism that led up to the internet bubbleNow after two busts several wars andgrowing fears of global warming it makesfor somewhat surreal reading

The cloud lends itself to similar hypershybole Yet so far there has not been much deshybate about its economic falloutprobablybecause the new economy ended badlyand the newest one is currently doing evenworse There will be many ways in whichthe cloud will change businesses and theeconomy most of them hard to predict butone theme is already emerging Businessesare becoming more like the technology itshy

self more adaptable more interwovenand more specialised These developshyments may not be new but cloud computshying will speed them up

Corporate IT has always promised tomake companies more agile In the 1990smany companies reshyengineered their busishyness processes when they started using aform of software called enterpriseshyreshysource planning (ERP) which does thingssuch as managing a rmrsquos nances andemployees But once these massive softshyware packages were in place it was exceedshyingly dicult to change them Implementshy

The long nimbus

The cloud will make businesses more adaptable interconnected and specialisedand often smaller

tres the computing needs of companiesand consumers vary too widely for onesize to t all

Even if the cloud is likely to transformthe IT industry some things will stay thesame One is the importance of lockshyin Ifanything companies and developers willbe even more dependent on cloud platshyforms and applications than they are onthe old kind SaaS promotes the hollowshying out of IT a rm that needs to migrateto another system will no longer have therequired expertise When Facebook saymakes a change to its platform developershave no choice but to go along with itSome are already calling for a CloudComputing Consortium in the mould ofthe World Wide Web Consortium (W3C)to set standards that allow applications tomigrate easily from one platform to anothshyer One standard initiative called OpenshySocial already allows the same webshybased application to run in several socialnetworks which are also clouds of sorts

But standards go only so far Some fearthat one company could try to monopoliseother key parts of the cloud ironically Mishycrosoft worries that Google is doing exactshyly that with the online advertising marketTo Steve Ballmer Microsoftrsquos boss Gooshyglersquos advertising platform is like a ywheelthat picks up speed as more websites atshytract more advertisers and vice versa

Eric Schmidt Googlersquos chief executivedenies any evil intent to achieve worlddomination He argues with some justicethat it would be hard for Google to controlthe cloud if only for technical reasonsmuch of it is already based on open stanshy

dards and its loose structure does not lenditself to locking customers in

Mr Schmidt promises that Google willnot lock its users in either Our competishytive advantage is not from lockshyin he saysbut from having specialised knowledgeof how to build data centres and how tobuild new software that is not reproducshyible such as our search algorithm This ishow we make our money

Yet Google is more like Microsoft than itlikes to admit says Nicholas Carr a techshynology writer and blogger Microsoft heargues achieved its dominant position inthe PC world not least by commoditising

products such as the browser that arecomplementary to its cash cows such asWindows as their cost came down deshymand for Microsoftrsquos products went up

Similarly Googlersquos natural instinct is todo its utmost to encourage people to spendmore time online because that will givethe company more opportunities to selladvertisements and collect data aboutthem According to Mr Carr almost everyshything the company doesbuilding hugedata centres ghting copyright restrictionsdigitising the worldrsquos libraries developinga new browser and most recently evenhelping to launch satellitesis aimed at inshycreasing the use of the internet Googlewants information to be free he recentlywrote in his blog because as the cost of inshyformation falls it makes more money

But Google may never become as powshyerful as Microsoft because regulators areunlikely to let it Microsoft was eventuallyput in the dock for abusing its monopolybecause it got too greedy pushing most ofthe rest of the industry to complain Giventhat the world has already lived throughthe Microsoft drama and that Google willaect many more industries the searchcompany is likely to be restrained muchearlier The rm is currently in negotiationswith the US Justice Department about acontroversial advertising partnership beshytween itself and one of its competitors Yashyhoo which would further strengthenGooglersquos position in online advertising

Even if the economics of the cloud arestill in ux though it is already clear that itwill have farshyreaching implications forbusinesses and for society as a whole 7

12 A special report on corporate IT The Economist October 25th 2008

2

1

ing SAP the market leader in ERP is likepouring concrete into your company goesan old joke among IT types

This helps to explain why in manyrms IT departments and business unitshave traditionally been at loggerheads Inrecent years tensions have worsenedCompanies must grapple with evershychangshying markets and regulations yet IT budgetsare being cut Many rms now have a hugebacklog of IT projects

Hence the interest in cloud computingIt turns capital expenditure into operationshyal expenditure which makes things mucheasier and cheaper Instead of having toshell out a lot of money for say a server totest an application and even with luckwait a few weeks for it to be up and runshyning managers just have to whip out acredit card open an account at AmazonWeb Services (AWS) and re up a virtualmachine for a few dollars

In many rms senior managers probashybly do not even know that business unitsare using AWS or similar services In someorganisations however it has already beshycome a muchshyappreciated RampD tool Pharshymaceutical companies for instance areregularly tapping into AWS to calculatesimulations Sogeti a European consultanshycy has used a cloud built by IBM to allow itto test new ideas and quickly put togetheran IT system for a companyshywide brainshystorming event

Cloud services have also been hugelysuccessful with startshyups which can nowenjoy infrastructure of the same quality aslarge companies In fact AWS is probablythe main reason why there are now somany rms oering all kinds of Web 20services Their usefulness may sometimesbe hard to gauge but that is a good thing Itis a sign of lively combinatorial innovashytion made possible because entrepreshyneurs can cheaply try new combinationsof technology says Googlersquos Mr Varian

Many startshyups would probably noteven exist without the cloud Take Anishymoto a service that lets users turn photosinto artsy music videos using articial inshytelligence When it launched on Facebooka social network demand was such that ithad to increase the number of its virtualmachines on AWS from 50 to 3500 withinthree days You could give me unlimitedfunding says Adam Selipsky of AWSand I wouldnrsquot know how to deploy thatmany servers in 72 hours

Combinatorial innovation should alsobe made easier by the fact that the cloudwill be a huge collection of electronic sershyvices based on standards But this serviceshy

oriented architecture will be even moreimportant for existing rms because itshould free their inner workingstheirbusiness processesfrom the straitjacketof their ERP systems and allow these proshycesses to be more easily adapted for inshystance to launch a new product

Again the software industry has beenpromising this for some years under thebanner of serviceshyoriented architecturediscussed in an earlier chapter Yet theadoption of SOA has been slow and manyprojects have failed says Chris Howard ofthe Burton Group a consultancy The reashysons are not just technical but cultural forexample some business units are not usedto sharing data Cloud computing will helpresolve some of these problems Manywebshybased services are built to be integratshyed into existing business processes

Donrsquot do it yourselfWhat eect will all this have on the natureof the rm If IT systems really allow comshypanies to become more modular and exshyible this should foster further specialisashytion It will become even easier tooutsource business processes or at leastthose parts of them where rms do not enshyjoy a competitive advantage Companieswill increasingly focus on their core andshed the context in the words of Geofshyfrey Moore managing director of TCG Adshy

visors a consultancyThis also means that companies will

rely more on services provided by othersThey will increasingly form process netshyworks a term for loosely connectedgroupings of specialised rms coined byJohn Hagel a business strategist at Deloitteamp Touche an auditing rm His prime exshyample is Li amp Fung a company based inHong Kong that has assembled a globalprocess network of nearly 10000 businesspartners in the clothing industry fromwhich it puts together customised supplychains for clothes designers

Both trends could mean that in futurehuge cloudswhich might be called inshydustry operating systemswill providebasic services for a particular sector for inshystance nance or logistics On top of thesesystems will sit many specialised and inshyterconnected rms just like applicationson a computing platform Yet this is onlyhalf the story The cloud changes not onlythe plumbing and structure of rms andindustries known as the transactionallayer but also their interactional layera term coined by Andy Mulholland chieftechnologist of Capgemini a consultancyHe denes this as the environment whereall the interactions between people takeplace both within an organisation andwith its business partners

Despite all the technology that has enshy

The Economist October 25th 2008 A special report on corporate IT 13

2

1

READERS may be excused if they havenever heard of Kinakuta It is a tiny isshy

land dreamed up by Neal Stephenson inhis novel Cryptonomicon In the scishyenceshyction classic libertarian technoloshygists and entrepreneurs try to turn it into adata haven for such things as anonymousonline banking and electronic money

Reality has indeed caught up with fanshytasy Iceland is about to become a Kinakuta

of sorts Data Islandia a local company istrying to establish the island as a vault for agrowing pile of data that rms must retainin order to comply with all kinds of regulashytions It has a compelling pitch With itscool climate abundant geothermal energyand secure remoteness Iceland appears tobe a prime location for data archives

As often however truth is strangerthan ction In a way Data Islandia is erectshy

ing borders in the cloud it intends to storeEuropean data according to European regshyulation and American bits according toAmerican rules What is more to keep thedata safe during transport they are pickedup with a data scooter (in essence a conshytainer lled with disk drives) and taken toIceland by aeroplaneas though breshyopshytic links had never been invented

This illustrates the political tensions

Computers without borders

The cloud may be the ultimate form of globalisation

tered the workplace in recent years so farthis layer has not really changed PCs cershytainly made people more productive butmost of their programs were not designedfor collaboration The enterprise applicashytions they worked with were still centralshyised systems And eshymail has in some waysmade things worse as the ood of messhysages takes up lots of time and attention

The dominant model is still that peoplerst labour individually and then mergetheir respective eorts says Mr Mulholshyland Itrsquos not much dierent from the ageof paper he writes in his book Mesh Colshylaboration Collaboration often meanspulling up your chair next to your colshyleague so you can look at the same screen

Consumers have pulled ahead of comshypanies in using cloudshybased services thatallow for better collaboration such asblogs wikis and social networks The rstgeneration of people that has grown up usshying all these tools is now entering theworkforce Being used to a culture of sharshying information freely these digital nashytives will be impatient with the rules oftraditional corporate IT

So it is helpful that rms have at last beshygun to embrace Web 20 technologies inearnest a trend predictably called Entershyprise 20 By 2013 companies around theglobe will spend $46 billion on such toolsaccording to Forrester Research What noshybody knows is how rms will trade o theadvantages of letting employees collaboshyrate with the outside world against the asshysociated risks for instance that condenshytial information is leaked Because of suchsecurity concerns (see chart 8) many rmsblock access to such sites as Facebook oncompany computers

Companies may not have much choicebut to open up says Mr Mulholland Emshy

ployees will increasingly resist constraintson their use of technology and they willhave a growing need to reach beyond thecorporate rewall Twenty years ago he arshygues 80 of the knowledge that workersrequired to do their jobs resided withintheir company Now it is only 20 becausethe world is changing ever faster We needto be open to new and unknown connecshytions with people and content he says

Exploiting the mesh in the words ofMr Mulholland will also mean that emshyployees may build simple applications oftheir own that allow them quickly to autoshymate repeat tasks using internal and extershynal IT services A new product by SerenaSoftware called Mashup Composer gives aforetaste of things to come Using a visualinterface even the not so technically mindshyed can quickly put together a service todeal say with travel requests or approvedocuments

Yet the impact of the cloud will also befelt on a macroeconomic level Just as itmakes small rms more competitive itwill help developing economies to move

ahead The biggest promise is that it willmake computing cheaper and easier touseand thus allow it to penetrate newmarkets says Russ Daniels chief technolshyogy ocer for HPrsquos cloudshyservices strategy

Hop skip and jumpThe mobile phone has already enabled deshyveloping countries to skip xedshyline netshyworks Cloud computing could prove to bea similar leapfrog technology because itdispenses with the need to build a cumbershysome IT infrastructure Software developshyers from a developing country can buildjust as great an application on our platformas somebody who lives in Palo Alto saysMr Benio of Salesforce

Indeed countries such as India will cershytainly take a big chunk of the global marketfor cloud services Zoho a popular suite ofwebshybased applications is operated by anIndian company AdventNet Indian hospishytals are already oering specialised healthshycare services this way The insurance armof ICICI an Indian bank has used thetechnology to come up with innovativeservices such as a personalised insurancefor diabetes Premiums are adjusted deshypending on how well policyholders stickto a tness plan All this suggests that theeconomic impact of the cloud may be feltnot only in the IT industry itself but in othshyer sectors too The internet disrupted themusic business Google disrupted the meshydia cloudshybased companies could becomedisrupters in other inecient industriesBuzzwords such as Health Care 20Banking 20 or even Education 20could soon acquire real meaning

But given that the cloud is global by nashyture how might it be regulated The conshyclusion of this special report will oersome answers 7

8Dangers within

Source Forrester

Research

How IT organisations feel about risk ofemployee-driven unsanctioned use of Web 20June 2008

Survey of 242 US IT decision-makers

at companies with 500+ employees

0 10 20 30 40 50

Very concerned

Somewhat concerned

Somewhat unconcerned

Completely unconcerned

14 A special report on corporate IT The Economist October 25th 2008

2

Previous special reports and a list offorthcoming ones can be found online

wwweconomistcomspecialreports

Future special reportsCountries and regionsSpain November 8thRussia November 29thIndia December 13th

Business nance economics and ideasCars in the developing world November 15th The sea January 3rd 2009The future of nance Jan 31st 2009

wwweconomistcomrights

Oer to readersReprints of this special report are available at aprice of pound350 plus postage and packing A minimum order of ve copies is required

Corporate oerCustomisation options on corporate orders of 100or more are available Please contact us to discussyour requirements

Send all orders to

The Rights and Syndication Department26 Red Lion SquareLondon WC1R 4HQ

Tel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492eshymail rightseconomistcom

For more information and to order special reportsand reprints online please visit our website

that will arise with the cloud In one way itis the ultimate form of globalisation vastvirtualised computer systems and elecshytronic services know no borders Yet govshyernments are likely to go to great lengths toavoid losing even more control

When the internet went mainstream inthe late 1990s libertarian thinkers arguedthat cyberspace was a distinct place callingfor laws and legal institutions of its ownAfter all they said it was built in such away that it interprets censorship as damshyage and routes around it But many govshyernments quickly found ways to blockcontent they deemed oensive Just look atChina and its great rewall

Controlling where data are stored andhow they are treated is harder though beshycause information can oat freely in thecloud And it is not just undemocratic govshyernments that want to control their citishyzensrsquo and companiesrsquo data indeed thereare nearly as many sets of data regulationas there are countries If we wanted to beon the safe side in terms of regulation weprobably would need 95 individual datacentres says Chuck Hollis a technologistat EMC the leading maker of storage gearwhich owns Mozy a cloud service that alshylows users to back up their data

There are technological xes to this proshyblem too Customers of Amazonrsquos storageservice for instance can have their datakept either in an American or a Europeandata centre In future cloud providers willoer many more options for where dataare kept and how they are protected Itseems possible that data as well as content

will eventually travel with security locashytion and expiry policies attached

It is when computers become virtualmachines that things get really trickyThese days IT systems are at the core ofmany companiesand just like data thesesystems can now live in a variety of placesWhat happens if they start to migrate toanother country where power is cheaperor regulation laxer Similarly if servicesare a combination of elements provided indierent jurisdictions who is liable ifsomething goes wrong

The cloudrsquos potential political and soshycial eect is only now entering the publicdebate IT rms are putting it on the agendaon both sides of the Atlantic In midshySepshytember for instance Google organised adiscussion on the subject in WashingtonDC A few days later SAP presented a whitepaper in Brussels pointing out that policyshymakers are not aware of the dramatic ecoshynomic impact of the Future Internet asthe paper calls the cloud

IT industry leaders note that ocialsfrom many countries have begun to takean interest in the cloud Some just wantdata centres to be built in their country tocreate jobs others are concerned about isshysues of law enforcement and jurisdictionThe danger they say is that cloud providshyers might be obliged to build more datacentres than are needed and have to comshyply with many dierent regulatory reshygimes Some of them have been oatingthe idea of freeshytrade zones for data censhytres where common rules would apply

Yet such ideas appear at odds with anshyother big question that could keep thecloud from growing how to protect prishyvacy Consumers expect their informashy

tion will be treated the same way on thecloud as if it were stored at home on theirown computers says Ari Schwartz of theCenter for Democracy and Technology anadvocacy group Many of the devices thatfeed into it such as sensors and cameraswill be intrusive For example Googlersquosvans go round taking streetshybyshystreet picshytures of cities for the companyrsquos onlinemap service called Streetview The picshytures are meant to help people nd theirway around but also often show passshyersshyby in embarrassing situations To proshytect their identity Google now blurs theirfaces and licence plates

Hands o my dataBut it is not only personal information thatcould get out into the open Privacy is aworry for companies tooand not just beshycause criminals or spies might intercepttheir data Once they are in the cloud govshyernments can also get their hands on themmore easily SWIFT the organisation thatmanages international bank transfers isplanning to build a data centre in neutralSwitzerland That will allow it to keep dataabout European transfers on the old contishynent where it cannot be subpoenaed bythe American government Webshybased eshymail is not safe either Thanks to the StoredCommunications Act American law enshyforcers can read peoplersquos messagesanddo not even have to tell the recipient

Just as too much regulation may keepthe cloud from rising high so could lack ofprivacy If consumers and companies canshynot be sure that their information is safethey will err on the side of caution But deshyspite all the caveats the precipitation fromthe cloud will be huge 7

4 A special report on corporate IT The Economist October 25th 2008

2 when needed and shut them down if thereis no demand (which is why the utility iscalled Elastic Computing Cloud or EC2)And the service is cheap a virtual machshyine for instance starts at 10 cents per hour

If Amazon has become a cloudshycomshyputing pioneer it is because it sees itself asa technology company As it branched outinto more and more retail categories it hadto develop a sophisticated computing platshyform which it is now oering as a servicefor a fee Of course this has nothing to dowith selling books says Adam Selipsky incharge of product management at AWSbut it has a lot to do with the same techshynology we are using to sell books

Yet Amazon is not the only big onlinecompany to oer the use of industrialshyscale data centres Google is said to be opshyerating a global network of about threedozen data centres loaded with more than2m servers (although it will not conrmthis) Microsoft is investing billions andadding up to 35000 servers a month Othshyer internet giants such as Yahoo are alsobusy building huge server farms

In some places this has led to a veritabledatashycentre construction boom Half a dozshyen are being built in Quincy a hamlet inthe middle of Americarsquos Washington stateclose to the Columbia River The attractionis that its dams produce plenty of lowshycostpower which apart from IT gear is themain input for these computing farms Onaverage cooling takes as much power ascomputing Microsoftrsquos new data centrenear Chicago for instance has three subshystations with a total capacity of 198MW asmuch as a small aluminium smelter

But cheap electricity is only one albeitimportant criterion for choosing the site ofa data centre Microsoft currently feeds 35sets of data into an electronic map of theworld including internet connectivity theavailability of IT workers even the airquality (dry air makes a good coolant) tosee where conditions are favourable andwhich places should be avoided Apparshyently Siberia comes out well

Google for its part seems to be thinkshying of moving oshore In August it apshyplied for a patent for watershybased data censhytres Computing centres are located on aship or ships anchored in a water bodyfrom which energy from natural motion ofthe water may be captured and turnedinto electricity andor pumping power forcooling pumps to carry heat away saysthe patent application

Many chief information ocers wouldlove to take their IT infrastructure out tosea and perhaps drown it there Even as deshy

mand for corporate computing continuesto increase IT budgets are being cut At thesame time many rmsrsquo existing IT infrashystructure is bursting at the seams Accordshying to IDC a marketshyresearch rm a quarshyter of corporate data centres in Americahave run out of space for more servers Forothers cooling has become a big constraintAnd often utilities cannot provide the extrapower needed for an expansion

Fewer bigger betterSo IDC thinks that many data centres willbe consolidated and given a big makeoverThe industry itself is taking the lead For exshyample HewlettshyPackard (HP) used to have85 data centres with 19000 IT workersworldwide but expects to cut this down tosix facilities in America with just 8000employees by the end of this year reducshying its IT budget from 4 to 2 of revenue

Other large organisations are followingsuit Using VMwarersquos software BT a teleshycoms rm has cut the number of servers in

its 57 data centres across the world from16000 to 10000 yet increased their workshyload The US Marine Corps is reducing thenumber of its IT sites from 175 to about 100Both organisations are also starting tobuild internal clouds so they can move apshyplications around Ever more rms are exshypected to start building similar inshyhouse orprivate clouds The current economicmalaise may speed up this trend as compashynies strive to become more ecient

But to what extent will companies outshysource their computing to public cloudssuch as Amazonrsquos James Staten of Forresshyter Research a marketshyresearch rm saysthe economics are compelling particularlyfor smaller rms Cloud providers he sayshave more expertise in running data censhytres and benet from a larger infrastrucshyture Yet many rms will not let companydata oat around in a public cloud wherethey could end up in the wrong hands Theconclusion of this report will consider thequestion of security in more detail

It does not help that Amazon and Gooshygle recently made headlines with serviceinterruptions Few cloud providers todayoer any assurances on things like conshytinuity of service or security (called sershyviceshylevel agreements or SLAs) or take onliability to back them up

As a result says Mr Staten cloud comshyputing has not yet moved much beyondthe earlyshyadopter phase meaning thatonly a few of the bigger companies are usshying it and then only for projects that do notcritically aect their business The Washshyington Post for instance used AmazonrsquosAWS to turn Hillary Clintonrsquos WhiteHouse schedule during her husbandrsquostime in oce with more than 17000 pagesinto a searchable database within 24hours NASDAQ uses it to power its serviceproviding historical stockmarket informashytion called Market Replay

Stefan van Overtveldt the man incharge of transforming BTrsquos IT infrastrucshyture thinks that to attract more customersservice providers will have to oer virtualprivate clouds fenced o within a publiccloud BT plans to oer these as a servicefor rms that quickly need extra capacity

So there will be not just one cloud but anumber of dierent sorts private ones andpublic ones which themselves will divideinto generalshypurpose and specialised onesCisco a leading maker of networking gearis already talking of an intercloud a fedshyeration of all kinds of clouds in the sameway that the internet is a network of netshyworks And all of those clouds will be fullof applications and services 7

The Economist October 25th 2008 A special report on corporate IT 5

1

WANT to become a programmer in 20minutes With the program from Iceshy

berg a startshyup you can Just open the getshyting started wizard and pick the type ofapplication say project managementType in its business objectsthings likeclient team and membersand tellthe tool how they relate to each otherThen design some input forms and denethe process for getting a project done Anshyother click and you are ready to go

In reality of course things are not thatsimple And many professional programshymers will sco at the development tool asa mere toy Yet Iceberg and similar outtsdemonstrate that geeks are losing their moshynopoly on programming Now with a bitof patience anybody can create a simpleapplication for instance to collaboratewith colleagues or to draw an online map

This democratisation of programminghowever is only a small part of somethingmuch deeper a fundamental change in thenature of software It is not just that moreand more software will become a servicedelivered online More importantly applishycations webshybased or not will no longercome as a big chunk of software but willbe made up of a combination of electronicservicesa shift that has picked up a lot ofspeed since computing began moving intothe cloud

To understand this new way of buildshying applications known as serviceshyorishyented architecture (SOA) think of a culishynary analogy Whereas the old chunk ofsoftware resembles a precooked meal thatjust has to be popped into the oven thenew architecture is more like a restaurantIt is a service in itself but also a combinashytion of subshyservices There is the waiter

who takes the order and conveys it to thekitchen There is the cook who preparesthe food And there are the cleaners whokeep the place tidy Together they create theapplication a restaurant

An attack of the vapoursThe importance of this shift from a monoshylithic product to services is hard to overshystate In a sense it has seeded the cloud alshylowing the dropletsthe services thatmake up the electronic vapourto form Itwill allow computing to expand in all dishyrections and serve ever more users Thenew architecture also helps the less technishycally minded to shape their own cloudsusing such tools as Icebergrsquos

Just as for the industrialisation of datacentres there is a historic precedent for thisshift in architecture the invention of movshyable type in the 15th century At the timeprinting itself was not a new idea But itwas Gutenberg and his collaborators whothought up the technologies needed tomake printing available on a mass scalecreating letters made of metal that could bequickly assembled and reshyused

Similarly the concept of modularityhas been around since the early days ofcomputing Everything in computer scishyence is to just write less code What is thetechnique for writing less code Itrsquos calledsubroutines said Bill Gates Microsoftrsquosfounder in a recent interview A subroushytine is a part of a program that can be reshyused just like movable type The idea saysMr Gates has always been to apply thisprinciple of a subroutine more broadly

Yet this did not happen mainly beshycause the cost of computing fell much fastshyer than that of communications Ever

cheaper and more powerful chips made itpossible to move from mainframes tominicomputers to personal computers(PCs) and now to handshyheld devices Butconnecting all these pieces remained dishycult and expensive which meant that suchdevices all had to come with their owndata and chunky programs Now thanks toplenty of cheap bandwidth and more andmore wireless connectivity computing isable to regroup into specialised services orMr Gatesrsquos subroutines We now live in aworld whereeth[a] subroutine can exist onanother computer across the internet

Part of Gutenbergrsquos genius was to recogshynise the need for all the letters to be identishycal in height so they could be easily comshybined Similarly for computing services towork there had to be robust technical stanshydards Only a few years ago this seemed farbeyond the IT industryrsquos reach Most rmsinsisted on their proprietary technologymostly to lock in their customers Againcheaper communications helped to bringabout change The success of the internetdemonstrated the huge benets of openstandards and forced vendors to agree oncommon ways for their wares to work toshygether One result is a stack of somethingcalled webshyservices standards

Serviceshyoriented architecture rstshowed up in openshysource software butwas quickly adopted by big enterpriseshysoftware vendors because they had apressing need for it says Jim Shepherd ofAMR Research a consultancy Big softwarevendors for instance had to nd a way tountangle the hairball of code that their proshyducts had become or else they themselveswould choke on it Customers wantedmore exible and extensible programs

Creating the cumulus

Software will be transformed into a combination of services

6 A special report on corporate IT The Economist October 25th 2008

2 Think back to the gastronomic examshyple A precooked meal is hard to changeand so are traditional software applicashytions By contrast a restaurant can easilychange its menu and its style of operationSimilarly SOAshybased software allowscompanies to alter their business processshyes such as the way they handle orders tocollect cash

SAP a German software rm was oneof the rst companies to put this serviceshyoriented architecture front and centreStarting in 2003 it developed among othshyer things a new corporateshysoftware packshyage that did away with monolithic applicashytions such as programs to keep track of acompanyrsquos nances or manage its relationshyship with customers Instead it introduceda collection of reshyusable components thatcould be strung together at will

IBM too is a fan of SOA and web sershyvices But its approach is somewhat diershyent given that it does not sell business apshyplications but makes most of its moneyfrom IT services and software to managethe underlying computing infrastructureIBM uses SOA mainly to help rms inteshygrate their increasingly complex and dispashyrate IT systems Its software turns theminto a collection of services that can bewoven into business processes

The approaches may be dierent butthe vision is the same to create IT systemsthat adapt to the business needs of compashynies and allow them to connect When Iwant to do something new explainsSteve Mills the boss of IBMrsquos softwaregroup I do not need to build a new applishycation but can use the pieces I alreadyhave To Peter Zencke who led the develshyopment of SAPrsquos new package its most exshyciting feature is that any of the processcomponents can now become a serviceprovided by some other rm

Despite millions of dollars spent onmarketing SOA it has not really taken oyet But many webshybased applications forconsumers rely on this concept The primeexample is Google Maps When the onlinegiant launched the service programmersquickly gured out how to mix the mapswith other sources of information This ishow for example Housingmapscom wascreated a combination of a Google mapwith the rental and sales listings fromCraigslist a website for classied ads Itwas one of the rst mashshyups as suchcombinations have come to be called

Since then the number of such mashshyups has exploded thanks mainly to sershyvices like Microsoftrsquos Popy and YahooPipes In essence these are graphical proshy

gramming tools Users drag and dropmodulesdata feeds providing such inshyformation as pictures headlines andsearch resultsand weave them together

Most of these mashshyups are still toysbut rms oering software as a servicehave started oering similar combinashytions In April Salesforcecom and Googleannounced that they would integrate theironline services Users of Salesforce whichhelps rms manage their customer relashytionships can now quickly switch to Gooshyglersquos webshybased applications

Smaller rms have already started toweave a network of services OpSource aSilicon Valley startshyup for instance proshyvides basic services for other SaaS rmsand web companies TriCipher anotherCalifornian newcomer authenticates usshyers of web applications Ribbit for its partallows these services to add voice commushynications to their oerings

Yet it is unlikely that the software cloudwill end up as a vast nebula of thousandsof specialised services Even creating a sershyviceshyoriented architecture is no silver bulshylet against complexity in a famous phraseby Frederick Brooks an elder of computerscience Although web services allow onshyline oerings to connect for instance it iscostly to synchronise their data And itwould not make sense for any rm to betits business on simple mashshyups

As software markets mature they tendto form two kinds of clumps integratedsuites of applications and platforms ontop of which others can build programsBoth forms are already emerging On theapplications side there is Google Apps and

Zoho which is even more comprehensiveIt encompasses a total of 18 applicationsincluding word processing project manshyagement and customershyrelationship manshyagement (CRM)

As for platforms there are already plenshyty in dierent shapes and sizes For entershyprise applications SAP has built one calledNetweaver Oracle oers something simishylar called Fusion Last year Salesforcelaunched a platform as a service allowshying other rms to use the plumbing thatsupports its own CRM oering

More recently platforms for consumerservices have been proliferating Faceshybook a social network was the rst to beshycome one in 2007 Other big online rmshave followed suit or will do so soon Gooshygle with App Engine Yahoo with YOSand Microsoft with a cloud operating sysshytem thought to be called Windows StrataSome predict a platform war to rival theepic ghts between Microsoftrsquos Windowsand Applersquos Macintosh

Never say dieWhat shape will the software cloud takeother than being a vast collection of sershyvices In one way it will look much like theold software world There will be a few bigplatforms akin to todayrsquos operating sysshytems and most applications will be writshyten to one of these platforms

What is less clear is just how much ofbusiness and consumer software will mishygrate into the cloud and how fast The anshyswer depends on whom you ask Unsurshyprisingly Marc Benio Salesforcersquosfounder and chief executive argues thatweb applications will spell the death ofsoftware But people are not about tothrow out their powerful PCs or other clishyent devices if only because many ofthem still work oine at times Similarlycompanies will always want to keep someapplications inshyhouse for reasons of secushyrity regulation or simply to maintain conshytrol Ray Ozzie Microsoftrsquos chief softwarearchitect promotes something calledsoftware plus services meaning thatcustomers will settle on the right mix ofold and new stu

If history is any guide Mr Ozzie is moreon the mark Even the biggest changes in IThave never spelt the death of anythingnotes Josh Greenbaum of Enterprise Apshyplications Consulting IBM for instance isstill making money with mainframes

So the software cloud just like its hardshyware underpinnings will be very diverseBut how will people make use of this kindof computing 7

4Looming ever larger

Source Gartner

Within the enterprise application

markets daggerEstimate

Worldwide software-as-a-service revenue $bn

2005 06 07dagger 08 09 10 110

2

4

6

8

10

12

200

159

90

259

957

Compound annual growthrate 2006-2011

291

Content communications and collaborations

Enterprise-resource planning

Supply-chain management

Customer-relationship management

Office suites and digital-content creation

Others

F O R E C A S T

The Economist October 25th 2008 A special report on corporate IT 7

1

IT WILL take something with a lot morebang to replace a medium that is thoushy

sands of years old That was the prevailingreaction when Amazon last November anshynounced the launch of Kindle an electronshyic book reader the size of a paperback thatcan store more than 200 volumes Yet bythe end of this year Amazon will have soldnearly 380000 Kindles says Mark Mahashyney an analyst with Citigroup a bankTurns out the Kindle is becoming the iPodof the book world he recently wrote in anote to clients in a reference to Applersquosiconic music player

It is certainly not the Kindlersquos looks thatexplain its success Compared with theiPod its design looks very last centurySoftware and battery life too leave a lot tobe desired The chief attraction of the deshyvice is the ease with which it can be used tobuy books and other content Equippedwith a mobileshyphone modem the Kindlecan simply pull new reading material outof the air Users do not even have to have awireless service contract Our vision is tohave every book that has ever been inprint available in less than 60 seconds exshyplains Je Bezos Amazonrsquos boss

It remains to be seen whether the Kinshydle will become a cultural phenomenonlike the iPod of which around 160m havebeen sold so far Amazon for its part isdownplaying the Kindlersquos success and willnot conrm any sales estimates But it issafe to say that once the next generation ofwireless networks is up and running hunshydreds of millions of devices will come likethe Kindle with builtshyin radio connectivity(see chart 5) Digital cameras will automatishycally upload pictures Smart meters willsend readings of how much electricity ahouse consumes All kinds of sensors willbe able to send messages even things likedipsticks when tanks of liquid are low

The relationship of these devices tocloud computing may not be obvious Butif huge data centres and applications makeup the cloud itself then all the hardwareand software through which it connectsand communicates with the real world areits periphery In IT speak this is known asthe front end or client side

As the Kindle and other examplesshow this layer does not have much to do

with the user interface or client device ofold It will do a lot of computing itself Itwill come in all shapes and sizes dependshying on what the user wants to do And itwill not just distribute information as theweb does but collect it as well The analoshygy that springs to mind here is a theatreperformance with audience participationthe electronic cloud will adapt to whateverit engulfs

As you like itJust like computing itself the dominantuser interface has evolved continually Inthe days of the mainframe when computshyers and their peripherals lled entirerooms people communicated with thesemachines rst via punch cards and thenvia greenshyglowing monitors which weresimply dumb terminals Only with the riseof personal computers did the user intershyface become more intelligent responsiveand graphical

The rst version of the web was thus abrief step backward To be sure browsersbrought colour and graphics to the hithershyto textshybased internet but they were asdumb as the mainframe terminal This haschanged only in recent years A bundle ofwebshydevelopment techniques dubbedAJAX and multimedia software such asAdobersquos Flash and Microsoftrsquos Silverlightnow allow programmers to write what arecalled rich internet applications (RIA)

Whatever the buzzword the principleis much the same Servers no longer dishup simple hypertext markup language(HTML) the webrsquos early lingua franca Inshycreasingly web pages are bona de piecesof software that are executed in the browsshyer Users of Web 20 sites who venture intomenu items such as view source in theirbrowsers can sometimes see thousands oflines of code

In recent months the browser has beshycome even more of a platform for otherprograms akin to an operating systemsuch as Windows The main driver of thistrend is Google with its huge strength indistribution that can only gain from moreand more software being oered as a sershyvice In May 2007 the Silicon Valley rmlaunched Gears a program that allowsweb applications to be used oine and inSeptember this year it released a newbrowser called Chrome Its most imporshytant feature is that it can execute several soshyphisticated web applications at once

Although for now the internet browserwill remain the main vehicle for people tointeract with the cloud other forms arecoming to the fore One is the widget asnippet of code that often lives on a PCrsquosdesktop and allows the user to get a quickpersonalised view of a set of data The ideais that a salesperson for instance shouldnot have to re up an entire application forcustomershyrelationship management tond out which leads to follow up

More importantly there is now a greatshyer variety of hardware through which toaccess the cloud Already desktop and lapshytop computers are starting to lose their moshynopoly for surng the web as smaller deshyvices such as smart mobile phones andvarious forms of portable computers startto compete with them

Asus a Taiwanese computershymakerstarted the trend when it launched a smallcheap laptop called Eee a year ago Nowthere are dozens of these devices Gartnerreckons that 52m of these minishynoteshybooks will be sold this year 8m next andas many as 50m in 2012

Perhaps the best indicator of things tocome is Intel a huge chipmaker It made afortune selling processors for servers pershysonal computers and laptops In June the

On the periphery

The cloudrsquos communications with its clients will become ever more intelligent and interactive

5Chatterboxes

Source iSuppli

Worldwide shipments of electronic productswith built-in wireless capability bn

2003 04 05 06 07 08 09 10 11 120

05

10

15

20

25

30

Local-area

Products with embedded wireless networking

Wide-areaTotal cellularhandsets

F O R E C A S T

8 A special report on corporate IT The Economist October 25th 2008

2 rm launched a new line of chips calledAtom designed to power what it calls netshybooks and mobile internet devices(MIDs) mainly intended for surng theweb Intel is also the driving force behindWiMAX a technology for wireless broadshyband access to the internet It wants to puta WiMAX radio chip into as many devicesas possible from portable computers tospecialised gadgets such as the Kindle

Applersquos iPhone and its App Storewhich allows iPhone and iPod owners todownload applications also provide aforetaste of how important wireless deshyvices will be for the cloud Apple launchedApp Store only in July Two months later ithad already tallied 100m downloadsmeaning that it took o much faster thanApplersquos highly successful iTunes musicstore Many of the programs on oer conshynect to the cloud including news feedsmultishyplayer games and a service thatkeeps track of the latest polls for Americarsquospresidential election

You can take it with youThe plethora of devices wirelessly conshynected to the internet will speed up a shiftthat is already under way from a deviceshycentric to an informationshycentric worldin the words of VMwarersquos Paul Maritz Upin the cloud there will be a body of data foreach individual that will accompany themthrough life he explains and it will not betied to any particular device as it is today

Again what will make this possible is

virtualisationthis time of client devicesnot servers With the help of software fromVMware and others some rms have alshyready virtualised their employeesrsquo desktopcomputers which allows them to be manshyaged centrally Operating systems and apshyplications will no longer run only on theemployeersquos PC but on a virtual machine ina data centre that can be accessed remotelytheoretically from any PC in the worldSooner or later mobile devices will also beshycome virtualised Users will be able to usetheir applications and data on whichevergadget they have at hand

Yet the cloudrsquos interface is designed notmerely to provide information but to gathshyer it as well The future belongs to servicesthat respond in real time to informationprovided either by their users or by nonshyhuman sensors predicts Tim OrsquoReilly thefounder of OrsquoReilly Media a publisher oftechnology books who coined the termWeb 20 Such live applications hesays will get better the more data they areable to collectand there will be plenty asthe cloud expands

One of the rst examples of such a sershyvice was Google What originally put thesearch service ahead of the competitionwhen it was launched a decade ago was itsway of harvesting the information providshyed by web users in linking to other sitesthe more links point to a page the moreuseful it must be These days most links aregenerated by computers so the originalform of this page rank algorithm has

long since been scrapped But Googlersquos apshyproach is still the same mining informashytion provided by web users such as theirsearch histories to provide more relevantsearch results and more eective and tarshygeted advertising

The direct link to users also allows rmssuch as Google continuously to improvetheir interface something traditional softshywareshymakers were not able to do At anygiven time Google is running dozens oftests to optimise the look and feel of its ofshyferings This makes web applications farless technologyshydriven and much moreusershyoriented says IBMrsquos Mr WladawskyshyBerger They are much more inspired bywhat goes on in the real world

A raft of startshyups is also trying to builda business by observing its users in eectturning them into human sensors One isWesabe (in which Mr OrsquoReilly has investshyed) At rst sight it looks much like any pershysonalshynance site that allows users to seetheir bank account and creditshycard inforshymation in one place But behind the scenesthe service is also sifting through its memshybersrsquo anonymised data to nd patterns andto oer recommendations for future transshyactions based for instance on how much aparticular customer regularly spends in asupermarket Wireless devices too will inshycreasingly become sensors that feed intothe cloud and adapt to new information

Nokia for its part is planning to buildall kinds of sensors into mobile phones tomonitor things like movement barometricpressure or even the ownerrsquos healthwhich many experts expect to become abig new trend Sensors could also be usedto record peoplersquos activities creating whatsome already term a lifelograising allkinds of privacy concerns

As wireless technology gets better andcheaper more and more dierent kinds ofobjects will connect directly to the cloudSAP the German softwareshymaker haslaunched a research project called The Inshyternet of Things to see what can be donewith the resulting information As part ofthat project an initiative called the FutureFactory is now under way to investigatehow intelligent tags can make manufacturshying more adaptive and ecient

More and more data get you only so farhowever In the end Googlersquos search reshysults and its textshybased online advertiseshyments are relevant to users only becausethe rm has devised clever ways to siftthrough them says Hal Varian the rmrsquoschief economist The big challenge of thecloud will be to connect the myriad data init and make them protable 7

The Economist October 25th 2008 A special report on corporate IT 9

1

EVEN elephants can die In 1993 extincshytion came close for IBM then the

worldrsquos largest computershymaker (it hassince been overtaken by HP) Its mainshyframe business was collapsing and protswere plummeting At that point LouisGerstner took over as chief executive andmanaged to turn the company aroundOnly a handful of people understandhow precariously close IBM came to runshyning out of cash in 1993 he writes in hismemoir Who Says Elephants CanrsquotDance Whether we would have had tole for bankruptcy I canrsquot say

There are many reasons why IBM nearshyly went bellyshyup not least the fact that BigBlue had become a bureaucratic monsterBut most critically it had failed to adapt tothe industryrsquos rst big platform shiftwhich only really made itself felt in the earshyly 1990s the move from mainframes tosmaller machines rst soshycalled minicomshyputers then personal computers IBMwas slow very slow in delivering distrishybuted computing and many small compashynies moved in to ll the gap Mr Gerstnerwrites

It is unlikely that the move into thecloud will produce a similar nearshydeath exshyperience or even a real casualtyif only beshycause IBM still stands as a warning Butthat does not mean that the structure of theIT industry will remain unchanged northat the economics will stay the sameOnce the IT sky really clouds over individshy

ual rmsrsquo share of the global IT budget (seechart 6) will shift

The move to distributed computingwhich started in the midshy1980s led to a bigchange in the IT industry In the era of themainframe computing came in a verticallyintegrated package mainly from IBM Withdistributed computing the industry beshycame a stack of horizontal layers In corshyporate IT these were mainly hardware thenetwork infrastructure software (such asoperating systems and databases) entershyprise applications and IT services

Not all of these layers were createdequal Computershymakers commanded athicker one for instance but software comshypanies were more protable The key proshygram was the operating system both onservers and on personal computers (clishyents) It was the standard to which othercomponents of IT systems had to conformUsually this was a version of Windowswhich made Microsoft the IBM of this newera of computing

Cloud computing is unlikely to bringabout quite such a dramatic shift In esshysence what it does is take the idea of distrishybuted computing a step farther Still it willadd a couple of layers to the IT stack One ismade up of the cloud providers such asAmazon and Google The other is softwarethat helps rms to turn their IT infrastrucshyture into their own cloud known as a virshytual operating system for data centres

Drawing a neat diagram of the IT stack

will also become increasingly dicult beshycause the layers are becoming less distinctIn a world of services it often does notmake sense to think of hardware and softshyware separately argues Padmasree Warshyrior the chief technology ocer of CiscoBoth need to be blended to oer new sershyvices she says

Mix and matchEven though the IT stack may not changeall that much the perceived value of thedierent layers will shift and with it theamount of prot IT rms can make fromeach of them Who will lose and who willwin depends on how much of computing

Highs and lows

As IT gets cloudier the economics of the business will change

6Follow the money

Source Gartner Forecast

Worldwide end-user spending $trn

2006 07 08 090

1

2

3

4

Computer hardware

Software

IT services

Telecomsequipment

Telecoms services

10 A special report on corporate IT The Economist October 25th 2008

2

1

eventually moves into the cloud In the rst round almost everybody in

the IT industry will do well as the cloudsare being built The biggest winners arelikely to be hardwareshymakers says MarkStahlman of Gartner Hardware alwayswins when new demand for computing isuncovered And we havenrsquot had such asweeping global demand since the 1990s

But in the longer term there will be relashytive winners and losers The hardwarebusiness could actually nd itself in thelosing group Its margins could getsqueezed as cloud computing matures beshycause there will be fewer customers withmore buying power says James Staten ofForrester Research Large cloud providerscan dictate how to build servers and atwhat price he notes

All that may explain why hardwareshymakers were among the rst to jump onthe cloudshycomputing bandwagon So farthey have done only what Mr Staten callscloudshywashing relabelling existing proshyducts that help customers build a moreexible IT infrastructure But they are alsopreparing for a time when more moneycan be made building clouds than buildingcomputers IBM and HP for instance haveteamed up with other rms and universishyties to design new cloud architectures

Which side of the fenceIn the long run says Mr Staten hardwareshymakers may be torn between supplyingcloud providers or becoming providersthemselves Being both will not be easybecause the rms would be competingwith their biggest customers Dell seems tohave decided to be a cloud supplier SunMicrosystems is a candidate to become aprovider it is oering a cloudshylike servicecalled Networkcom albeit not very sucshycessfully HP and IBM already used to thebalancing act of selling hardware and proshyviding IT services will try to do both

Makers of traditional software will ndthe going even tougher With the advent ofopenshysource software in particular Linuxselling operating systems had already beshycome less protable In a virtual worldthey will become even more commodishytised which is bad news for MicrosoftMany business applications no longerneed a big generalshypurpose server operatshying system but can use a specialised onewhich should put pressure on prices Onclient computers more and more applicashytions are written to run in browsers not onany particular operating system

Makers of business applications arealso on the defensive Traditionally they

have made billions by selling their proshygrams often demanding hefty sums to inshystall them and then charging an annualmaintenance fee for upgrades and technishycal support But this highly lucrative busishyness model has come under increasingpressure says Michael Cusumano a proshyfessor at the Massachusetts Institute ofTechnology (MIT)

For one he says software vendors willhave to nd new ways to charge for theirwares in the cloud tying licensing fees tothe number of users for instance will bedicult since services will mostly be conshysumed by other machines More imporshytantly the corporate world has becomeless and less willing to buy software forlarge sums of money so software rms listshyed on Americarsquos stockmarkets now makemost of their prots from maintenanceand other services (see chart 7) SAP will inshycrease its annual maintenance fees to atleast 22 of a programrsquos value over thenext few years in line with those of Oracleits main rival

Yet the biggest challenge for softwarerms is to become providers of online sershyvices themselves says Brent Thill of Citi Inshyvestment Research So far they havemoved slowly oering SaaS only on theside if at all This was partly because theircustomers were not that keen But moreimportantly notes Mr Thill the softwarehouses are still wedded to their old busishyness model With SaaS they do not get a bigupfront payment only subscription fees

Once Salesforce and NetSuite hadshown that the SaaS model works the inshycumbents began to move faster In Septemshyber last year for instance SAP presentedBusiness ByDesign a package of webshybased enterprise applications for smallerbusinesses But success will not come easishyly SAP has slowed down the introductionof the new service because it still needs towork out how to run it cheaply enough tomake a reasonable prot

Pure SaaS providers also have a lot ontheir minds Some experts such as JoshuaGreenbaum of Enterprise ApplicationsConsulting reckon that few will ever be asprotable as traditional software rms Alshythough it is almost a decade old Salesforcestarted making money only in 2006 mainshyly because it rst had to spend heavily onmarketing to attract customers But nowthat the service has 1m users and revenuesof more than $1 billion these costs willcome down says the rm

The companies that have the bestchance of making money from the cloudare those that get things to connect and

work together and help customers movetheir computing around This is music tothe ears of big IT rms not least IBM Nearshyly 80 of its revenues come from infrashystructure software and IT services which itcan oer globally HP is catching up havingtaken over EDS another big ITshyservicesrm Both Microsoft and SAP for their partbelieve that rms will want to have achoice in where to do their computing aswell as the exibility to move thingsaround over time

Two potentially important contestantsare rarely mentioned Cisco and EMC theleading makers of networking and storagegear respectively Having invested a lot insoftware and services Cisco has becomemore than just the source of most of theworldrsquos routers the trac cops of the intershynet It is betting that in the cloud the netshywork layer will become more importantfor instance to ensure that computingworkloads are able to move around seshycurely EMC for its part has made two dozshyen cloudshyrelated investments andlaunched a cloudshyinfrastructure division

Whoever manages to own the domishynant operating system for the data centrecould become a big winner VMware isbound to have a shot at this As well as beshying the market leader in virtualisation ithas the support of EMC which holds 86of the rm But the competition is likely tobe intense

Will this prospective platform war proshyduce a dominant company in the mould ofIBM or Microsoft that is able to extractmore than its fair share of the prots Probshyably not because it will be relatively easyto switch between vendors says GeorgeGilbert of Tech Strategy Partners a consulshytancy Nor is it likely that one rm willmanage to build a global cloud monopolyAlthough there are important economiesof scale in building a network of data censhy

7Serving up a treat

Source Michael Cusumano

Massachusetts Institute of Technology

US-listed software-firmsrsquo sales of total

1990 92 94 96 98 02 042000 06

03

04

05

06

07

Services

Products

The Economist October 25th 2008 A special report on corporate IT 11

2

1

BUSINESSES as well as most organishysations outside the business world

begin to shift from hierarchical processesto networked ones Nearly every facet ofhuman activity is transformed in someway by the emergent fabric of interconnecshytion This reorganisation leads to dramaticimprovements in eciency and producshytivity So said Wired magazine the centralorgan of Web 10 in July 1997 in an essay enshytitled The Long Boom arguing that theworld was in for 25 years of prosperityfreedom and a better environment Backthen the article reected the general optishy

mism that led up to the internet bubbleNow after two busts several wars andgrowing fears of global warming it makesfor somewhat surreal reading

The cloud lends itself to similar hypershybole Yet so far there has not been much deshybate about its economic falloutprobablybecause the new economy ended badlyand the newest one is currently doing evenworse There will be many ways in whichthe cloud will change businesses and theeconomy most of them hard to predict butone theme is already emerging Businessesare becoming more like the technology itshy

self more adaptable more interwovenand more specialised These developshyments may not be new but cloud computshying will speed them up

Corporate IT has always promised tomake companies more agile In the 1990smany companies reshyengineered their busishyness processes when they started using aform of software called enterpriseshyreshysource planning (ERP) which does thingssuch as managing a rmrsquos nances andemployees But once these massive softshyware packages were in place it was exceedshyingly dicult to change them Implementshy

The long nimbus

The cloud will make businesses more adaptable interconnected and specialisedand often smaller

tres the computing needs of companiesand consumers vary too widely for onesize to t all

Even if the cloud is likely to transformthe IT industry some things will stay thesame One is the importance of lockshyin Ifanything companies and developers willbe even more dependent on cloud platshyforms and applications than they are onthe old kind SaaS promotes the hollowshying out of IT a rm that needs to migrateto another system will no longer have therequired expertise When Facebook saymakes a change to its platform developershave no choice but to go along with itSome are already calling for a CloudComputing Consortium in the mould ofthe World Wide Web Consortium (W3C)to set standards that allow applications tomigrate easily from one platform to anothshyer One standard initiative called OpenshySocial already allows the same webshybased application to run in several socialnetworks which are also clouds of sorts

But standards go only so far Some fearthat one company could try to monopoliseother key parts of the cloud ironically Mishycrosoft worries that Google is doing exactshyly that with the online advertising marketTo Steve Ballmer Microsoftrsquos boss Gooshyglersquos advertising platform is like a ywheelthat picks up speed as more websites atshytract more advertisers and vice versa

Eric Schmidt Googlersquos chief executivedenies any evil intent to achieve worlddomination He argues with some justicethat it would be hard for Google to controlthe cloud if only for technical reasonsmuch of it is already based on open stanshy

dards and its loose structure does not lenditself to locking customers in

Mr Schmidt promises that Google willnot lock its users in either Our competishytive advantage is not from lockshyin he saysbut from having specialised knowledgeof how to build data centres and how tobuild new software that is not reproducshyible such as our search algorithm This ishow we make our money

Yet Google is more like Microsoft than itlikes to admit says Nicholas Carr a techshynology writer and blogger Microsoft heargues achieved its dominant position inthe PC world not least by commoditising

products such as the browser that arecomplementary to its cash cows such asWindows as their cost came down deshymand for Microsoftrsquos products went up

Similarly Googlersquos natural instinct is todo its utmost to encourage people to spendmore time online because that will givethe company more opportunities to selladvertisements and collect data aboutthem According to Mr Carr almost everyshything the company doesbuilding hugedata centres ghting copyright restrictionsdigitising the worldrsquos libraries developinga new browser and most recently evenhelping to launch satellitesis aimed at inshycreasing the use of the internet Googlewants information to be free he recentlywrote in his blog because as the cost of inshyformation falls it makes more money

But Google may never become as powshyerful as Microsoft because regulators areunlikely to let it Microsoft was eventuallyput in the dock for abusing its monopolybecause it got too greedy pushing most ofthe rest of the industry to complain Giventhat the world has already lived throughthe Microsoft drama and that Google willaect many more industries the searchcompany is likely to be restrained muchearlier The rm is currently in negotiationswith the US Justice Department about acontroversial advertising partnership beshytween itself and one of its competitors Yashyhoo which would further strengthenGooglersquos position in online advertising

Even if the economics of the cloud arestill in ux though it is already clear that itwill have farshyreaching implications forbusinesses and for society as a whole 7

12 A special report on corporate IT The Economist October 25th 2008

2

1

ing SAP the market leader in ERP is likepouring concrete into your company goesan old joke among IT types

This helps to explain why in manyrms IT departments and business unitshave traditionally been at loggerheads Inrecent years tensions have worsenedCompanies must grapple with evershychangshying markets and regulations yet IT budgetsare being cut Many rms now have a hugebacklog of IT projects

Hence the interest in cloud computingIt turns capital expenditure into operationshyal expenditure which makes things mucheasier and cheaper Instead of having toshell out a lot of money for say a server totest an application and even with luckwait a few weeks for it to be up and runshyning managers just have to whip out acredit card open an account at AmazonWeb Services (AWS) and re up a virtualmachine for a few dollars

In many rms senior managers probashybly do not even know that business unitsare using AWS or similar services In someorganisations however it has already beshycome a muchshyappreciated RampD tool Pharshymaceutical companies for instance areregularly tapping into AWS to calculatesimulations Sogeti a European consultanshycy has used a cloud built by IBM to allow itto test new ideas and quickly put togetheran IT system for a companyshywide brainshystorming event

Cloud services have also been hugelysuccessful with startshyups which can nowenjoy infrastructure of the same quality aslarge companies In fact AWS is probablythe main reason why there are now somany rms oering all kinds of Web 20services Their usefulness may sometimesbe hard to gauge but that is a good thing Itis a sign of lively combinatorial innovashytion made possible because entrepreshyneurs can cheaply try new combinationsof technology says Googlersquos Mr Varian

Many startshyups would probably noteven exist without the cloud Take Anishymoto a service that lets users turn photosinto artsy music videos using articial inshytelligence When it launched on Facebooka social network demand was such that ithad to increase the number of its virtualmachines on AWS from 50 to 3500 withinthree days You could give me unlimitedfunding says Adam Selipsky of AWSand I wouldnrsquot know how to deploy thatmany servers in 72 hours

Combinatorial innovation should alsobe made easier by the fact that the cloudwill be a huge collection of electronic sershyvices based on standards But this serviceshy

oriented architecture will be even moreimportant for existing rms because itshould free their inner workingstheirbusiness processesfrom the straitjacketof their ERP systems and allow these proshycesses to be more easily adapted for inshystance to launch a new product

Again the software industry has beenpromising this for some years under thebanner of serviceshyoriented architecturediscussed in an earlier chapter Yet theadoption of SOA has been slow and manyprojects have failed says Chris Howard ofthe Burton Group a consultancy The reashysons are not just technical but cultural forexample some business units are not usedto sharing data Cloud computing will helpresolve some of these problems Manywebshybased services are built to be integratshyed into existing business processes

Donrsquot do it yourselfWhat eect will all this have on the natureof the rm If IT systems really allow comshypanies to become more modular and exshyible this should foster further specialisashytion It will become even easier tooutsource business processes or at leastthose parts of them where rms do not enshyjoy a competitive advantage Companieswill increasingly focus on their core andshed the context in the words of Geofshyfrey Moore managing director of TCG Adshy

visors a consultancyThis also means that companies will

rely more on services provided by othersThey will increasingly form process netshyworks a term for loosely connectedgroupings of specialised rms coined byJohn Hagel a business strategist at Deloitteamp Touche an auditing rm His prime exshyample is Li amp Fung a company based inHong Kong that has assembled a globalprocess network of nearly 10000 businesspartners in the clothing industry fromwhich it puts together customised supplychains for clothes designers

Both trends could mean that in futurehuge cloudswhich might be called inshydustry operating systemswill providebasic services for a particular sector for inshystance nance or logistics On top of thesesystems will sit many specialised and inshyterconnected rms just like applicationson a computing platform Yet this is onlyhalf the story The cloud changes not onlythe plumbing and structure of rms andindustries known as the transactionallayer but also their interactional layera term coined by Andy Mulholland chieftechnologist of Capgemini a consultancyHe denes this as the environment whereall the interactions between people takeplace both within an organisation andwith its business partners

Despite all the technology that has enshy

The Economist October 25th 2008 A special report on corporate IT 13

2

1

READERS may be excused if they havenever heard of Kinakuta It is a tiny isshy

land dreamed up by Neal Stephenson inhis novel Cryptonomicon In the scishyenceshyction classic libertarian technoloshygists and entrepreneurs try to turn it into adata haven for such things as anonymousonline banking and electronic money

Reality has indeed caught up with fanshytasy Iceland is about to become a Kinakuta

of sorts Data Islandia a local company istrying to establish the island as a vault for agrowing pile of data that rms must retainin order to comply with all kinds of regulashytions It has a compelling pitch With itscool climate abundant geothermal energyand secure remoteness Iceland appears tobe a prime location for data archives

As often however truth is strangerthan ction In a way Data Islandia is erectshy

ing borders in the cloud it intends to storeEuropean data according to European regshyulation and American bits according toAmerican rules What is more to keep thedata safe during transport they are pickedup with a data scooter (in essence a conshytainer lled with disk drives) and taken toIceland by aeroplaneas though breshyopshytic links had never been invented

This illustrates the political tensions

Computers without borders

The cloud may be the ultimate form of globalisation

tered the workplace in recent years so farthis layer has not really changed PCs cershytainly made people more productive butmost of their programs were not designedfor collaboration The enterprise applicashytions they worked with were still centralshyised systems And eshymail has in some waysmade things worse as the ood of messhysages takes up lots of time and attention

The dominant model is still that peoplerst labour individually and then mergetheir respective eorts says Mr Mulholshyland Itrsquos not much dierent from the ageof paper he writes in his book Mesh Colshylaboration Collaboration often meanspulling up your chair next to your colshyleague so you can look at the same screen

Consumers have pulled ahead of comshypanies in using cloudshybased services thatallow for better collaboration such asblogs wikis and social networks The rstgeneration of people that has grown up usshying all these tools is now entering theworkforce Being used to a culture of sharshying information freely these digital nashytives will be impatient with the rules oftraditional corporate IT

So it is helpful that rms have at last beshygun to embrace Web 20 technologies inearnest a trend predictably called Entershyprise 20 By 2013 companies around theglobe will spend $46 billion on such toolsaccording to Forrester Research What noshybody knows is how rms will trade o theadvantages of letting employees collaboshyrate with the outside world against the asshysociated risks for instance that condenshytial information is leaked Because of suchsecurity concerns (see chart 8) many rmsblock access to such sites as Facebook oncompany computers

Companies may not have much choicebut to open up says Mr Mulholland Emshy

ployees will increasingly resist constraintson their use of technology and they willhave a growing need to reach beyond thecorporate rewall Twenty years ago he arshygues 80 of the knowledge that workersrequired to do their jobs resided withintheir company Now it is only 20 becausethe world is changing ever faster We needto be open to new and unknown connecshytions with people and content he says

Exploiting the mesh in the words ofMr Mulholland will also mean that emshyployees may build simple applications oftheir own that allow them quickly to autoshymate repeat tasks using internal and extershynal IT services A new product by SerenaSoftware called Mashup Composer gives aforetaste of things to come Using a visualinterface even the not so technically mindshyed can quickly put together a service todeal say with travel requests or approvedocuments

Yet the impact of the cloud will also befelt on a macroeconomic level Just as itmakes small rms more competitive itwill help developing economies to move

ahead The biggest promise is that it willmake computing cheaper and easier touseand thus allow it to penetrate newmarkets says Russ Daniels chief technolshyogy ocer for HPrsquos cloudshyservices strategy

Hop skip and jumpThe mobile phone has already enabled deshyveloping countries to skip xedshyline netshyworks Cloud computing could prove to bea similar leapfrog technology because itdispenses with the need to build a cumbershysome IT infrastructure Software developshyers from a developing country can buildjust as great an application on our platformas somebody who lives in Palo Alto saysMr Benio of Salesforce

Indeed countries such as India will cershytainly take a big chunk of the global marketfor cloud services Zoho a popular suite ofwebshybased applications is operated by anIndian company AdventNet Indian hospishytals are already oering specialised healthshycare services this way The insurance armof ICICI an Indian bank has used thetechnology to come up with innovativeservices such as a personalised insurancefor diabetes Premiums are adjusted deshypending on how well policyholders stickto a tness plan All this suggests that theeconomic impact of the cloud may be feltnot only in the IT industry itself but in othshyer sectors too The internet disrupted themusic business Google disrupted the meshydia cloudshybased companies could becomedisrupters in other inecient industriesBuzzwords such as Health Care 20Banking 20 or even Education 20could soon acquire real meaning

But given that the cloud is global by nashyture how might it be regulated The conshyclusion of this special report will oersome answers 7

8Dangers within

Source Forrester

Research

How IT organisations feel about risk ofemployee-driven unsanctioned use of Web 20June 2008

Survey of 242 US IT decision-makers

at companies with 500+ employees

0 10 20 30 40 50

Very concerned

Somewhat concerned

Somewhat unconcerned

Completely unconcerned

14 A special report on corporate IT The Economist October 25th 2008

2

Previous special reports and a list offorthcoming ones can be found online

wwweconomistcomspecialreports

Future special reportsCountries and regionsSpain November 8thRussia November 29thIndia December 13th

Business nance economics and ideasCars in the developing world November 15th The sea January 3rd 2009The future of nance Jan 31st 2009

wwweconomistcomrights

Oer to readersReprints of this special report are available at aprice of pound350 plus postage and packing A minimum order of ve copies is required

Corporate oerCustomisation options on corporate orders of 100or more are available Please contact us to discussyour requirements

Send all orders to

The Rights and Syndication Department26 Red Lion SquareLondon WC1R 4HQ

Tel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492eshymail rightseconomistcom

For more information and to order special reportsand reprints online please visit our website

that will arise with the cloud In one way itis the ultimate form of globalisation vastvirtualised computer systems and elecshytronic services know no borders Yet govshyernments are likely to go to great lengths toavoid losing even more control

When the internet went mainstream inthe late 1990s libertarian thinkers arguedthat cyberspace was a distinct place callingfor laws and legal institutions of its ownAfter all they said it was built in such away that it interprets censorship as damshyage and routes around it But many govshyernments quickly found ways to blockcontent they deemed oensive Just look atChina and its great rewall

Controlling where data are stored andhow they are treated is harder though beshycause information can oat freely in thecloud And it is not just undemocratic govshyernments that want to control their citishyzensrsquo and companiesrsquo data indeed thereare nearly as many sets of data regulationas there are countries If we wanted to beon the safe side in terms of regulation weprobably would need 95 individual datacentres says Chuck Hollis a technologistat EMC the leading maker of storage gearwhich owns Mozy a cloud service that alshylows users to back up their data

There are technological xes to this proshyblem too Customers of Amazonrsquos storageservice for instance can have their datakept either in an American or a Europeandata centre In future cloud providers willoer many more options for where dataare kept and how they are protected Itseems possible that data as well as content

will eventually travel with security locashytion and expiry policies attached

It is when computers become virtualmachines that things get really trickyThese days IT systems are at the core ofmany companiesand just like data thesesystems can now live in a variety of placesWhat happens if they start to migrate toanother country where power is cheaperor regulation laxer Similarly if servicesare a combination of elements provided indierent jurisdictions who is liable ifsomething goes wrong

The cloudrsquos potential political and soshycial eect is only now entering the publicdebate IT rms are putting it on the agendaon both sides of the Atlantic In midshySepshytember for instance Google organised adiscussion on the subject in WashingtonDC A few days later SAP presented a whitepaper in Brussels pointing out that policyshymakers are not aware of the dramatic ecoshynomic impact of the Future Internet asthe paper calls the cloud

IT industry leaders note that ocialsfrom many countries have begun to takean interest in the cloud Some just wantdata centres to be built in their country tocreate jobs others are concerned about isshysues of law enforcement and jurisdictionThe danger they say is that cloud providshyers might be obliged to build more datacentres than are needed and have to comshyply with many dierent regulatory reshygimes Some of them have been oatingthe idea of freeshytrade zones for data censhytres where common rules would apply

Yet such ideas appear at odds with anshyother big question that could keep thecloud from growing how to protect prishyvacy Consumers expect their informashy

tion will be treated the same way on thecloud as if it were stored at home on theirown computers says Ari Schwartz of theCenter for Democracy and Technology anadvocacy group Many of the devices thatfeed into it such as sensors and cameraswill be intrusive For example Googlersquosvans go round taking streetshybyshystreet picshytures of cities for the companyrsquos onlinemap service called Streetview The picshytures are meant to help people nd theirway around but also often show passshyersshyby in embarrassing situations To proshytect their identity Google now blurs theirfaces and licence plates

Hands o my dataBut it is not only personal information thatcould get out into the open Privacy is aworry for companies tooand not just beshycause criminals or spies might intercepttheir data Once they are in the cloud govshyernments can also get their hands on themmore easily SWIFT the organisation thatmanages international bank transfers isplanning to build a data centre in neutralSwitzerland That will allow it to keep dataabout European transfers on the old contishynent where it cannot be subpoenaed bythe American government Webshybased eshymail is not safe either Thanks to the StoredCommunications Act American law enshyforcers can read peoplersquos messagesanddo not even have to tell the recipient

Just as too much regulation may keepthe cloud from rising high so could lack ofprivacy If consumers and companies canshynot be sure that their information is safethey will err on the side of caution But deshyspite all the caveats the precipitation fromthe cloud will be huge 7

The Economist October 25th 2008 A special report on corporate IT 5

1

WANT to become a programmer in 20minutes With the program from Iceshy

berg a startshyup you can Just open the getshyting started wizard and pick the type ofapplication say project managementType in its business objectsthings likeclient team and membersand tellthe tool how they relate to each otherThen design some input forms and denethe process for getting a project done Anshyother click and you are ready to go

In reality of course things are not thatsimple And many professional programshymers will sco at the development tool asa mere toy Yet Iceberg and similar outtsdemonstrate that geeks are losing their moshynopoly on programming Now with a bitof patience anybody can create a simpleapplication for instance to collaboratewith colleagues or to draw an online map

This democratisation of programminghowever is only a small part of somethingmuch deeper a fundamental change in thenature of software It is not just that moreand more software will become a servicedelivered online More importantly applishycations webshybased or not will no longercome as a big chunk of software but willbe made up of a combination of electronicservicesa shift that has picked up a lot ofspeed since computing began moving intothe cloud

To understand this new way of buildshying applications known as serviceshyorishyented architecture (SOA) think of a culishynary analogy Whereas the old chunk ofsoftware resembles a precooked meal thatjust has to be popped into the oven thenew architecture is more like a restaurantIt is a service in itself but also a combinashytion of subshyservices There is the waiter

who takes the order and conveys it to thekitchen There is the cook who preparesthe food And there are the cleaners whokeep the place tidy Together they create theapplication a restaurant

An attack of the vapoursThe importance of this shift from a monoshylithic product to services is hard to overshystate In a sense it has seeded the cloud alshylowing the dropletsthe services thatmake up the electronic vapourto form Itwill allow computing to expand in all dishyrections and serve ever more users Thenew architecture also helps the less technishycally minded to shape their own cloudsusing such tools as Icebergrsquos

Just as for the industrialisation of datacentres there is a historic precedent for thisshift in architecture the invention of movshyable type in the 15th century At the timeprinting itself was not a new idea But itwas Gutenberg and his collaborators whothought up the technologies needed tomake printing available on a mass scalecreating letters made of metal that could bequickly assembled and reshyused

Similarly the concept of modularityhas been around since the early days ofcomputing Everything in computer scishyence is to just write less code What is thetechnique for writing less code Itrsquos calledsubroutines said Bill Gates Microsoftrsquosfounder in a recent interview A subroushytine is a part of a program that can be reshyused just like movable type The idea saysMr Gates has always been to apply thisprinciple of a subroutine more broadly

Yet this did not happen mainly beshycause the cost of computing fell much fastshyer than that of communications Ever

cheaper and more powerful chips made itpossible to move from mainframes tominicomputers to personal computers(PCs) and now to handshyheld devices Butconnecting all these pieces remained dishycult and expensive which meant that suchdevices all had to come with their owndata and chunky programs Now thanks toplenty of cheap bandwidth and more andmore wireless connectivity computing isable to regroup into specialised services orMr Gatesrsquos subroutines We now live in aworld whereeth[a] subroutine can exist onanother computer across the internet

Part of Gutenbergrsquos genius was to recogshynise the need for all the letters to be identishycal in height so they could be easily comshybined Similarly for computing services towork there had to be robust technical stanshydards Only a few years ago this seemed farbeyond the IT industryrsquos reach Most rmsinsisted on their proprietary technologymostly to lock in their customers Againcheaper communications helped to bringabout change The success of the internetdemonstrated the huge benets of openstandards and forced vendors to agree oncommon ways for their wares to work toshygether One result is a stack of somethingcalled webshyservices standards

Serviceshyoriented architecture rstshowed up in openshysource software butwas quickly adopted by big enterpriseshysoftware vendors because they had apressing need for it says Jim Shepherd ofAMR Research a consultancy Big softwarevendors for instance had to nd a way tountangle the hairball of code that their proshyducts had become or else they themselveswould choke on it Customers wantedmore exible and extensible programs

Creating the cumulus

Software will be transformed into a combination of services

6 A special report on corporate IT The Economist October 25th 2008

2 Think back to the gastronomic examshyple A precooked meal is hard to changeand so are traditional software applicashytions By contrast a restaurant can easilychange its menu and its style of operationSimilarly SOAshybased software allowscompanies to alter their business processshyes such as the way they handle orders tocollect cash

SAP a German software rm was oneof the rst companies to put this serviceshyoriented architecture front and centreStarting in 2003 it developed among othshyer things a new corporateshysoftware packshyage that did away with monolithic applicashytions such as programs to keep track of acompanyrsquos nances or manage its relationshyship with customers Instead it introduceda collection of reshyusable components thatcould be strung together at will

IBM too is a fan of SOA and web sershyvices But its approach is somewhat diershyent given that it does not sell business apshyplications but makes most of its moneyfrom IT services and software to managethe underlying computing infrastructureIBM uses SOA mainly to help rms inteshygrate their increasingly complex and dispashyrate IT systems Its software turns theminto a collection of services that can bewoven into business processes

The approaches may be dierent butthe vision is the same to create IT systemsthat adapt to the business needs of compashynies and allow them to connect When Iwant to do something new explainsSteve Mills the boss of IBMrsquos softwaregroup I do not need to build a new applishycation but can use the pieces I alreadyhave To Peter Zencke who led the develshyopment of SAPrsquos new package its most exshyciting feature is that any of the processcomponents can now become a serviceprovided by some other rm

Despite millions of dollars spent onmarketing SOA it has not really taken oyet But many webshybased applications forconsumers rely on this concept The primeexample is Google Maps When the onlinegiant launched the service programmersquickly gured out how to mix the mapswith other sources of information This ishow for example Housingmapscom wascreated a combination of a Google mapwith the rental and sales listings fromCraigslist a website for classied ads Itwas one of the rst mashshyups as suchcombinations have come to be called

Since then the number of such mashshyups has exploded thanks mainly to sershyvices like Microsoftrsquos Popy and YahooPipes In essence these are graphical proshy

gramming tools Users drag and dropmodulesdata feeds providing such inshyformation as pictures headlines andsearch resultsand weave them together

Most of these mashshyups are still toysbut rms oering software as a servicehave started oering similar combinashytions In April Salesforcecom and Googleannounced that they would integrate theironline services Users of Salesforce whichhelps rms manage their customer relashytionships can now quickly switch to Gooshyglersquos webshybased applications

Smaller rms have already started toweave a network of services OpSource aSilicon Valley startshyup for instance proshyvides basic services for other SaaS rmsand web companies TriCipher anotherCalifornian newcomer authenticates usshyers of web applications Ribbit for its partallows these services to add voice commushynications to their oerings

Yet it is unlikely that the software cloudwill end up as a vast nebula of thousandsof specialised services Even creating a sershyviceshyoriented architecture is no silver bulshylet against complexity in a famous phraseby Frederick Brooks an elder of computerscience Although web services allow onshyline oerings to connect for instance it iscostly to synchronise their data And itwould not make sense for any rm to betits business on simple mashshyups

As software markets mature they tendto form two kinds of clumps integratedsuites of applications and platforms ontop of which others can build programsBoth forms are already emerging On theapplications side there is Google Apps and

Zoho which is even more comprehensiveIt encompasses a total of 18 applicationsincluding word processing project manshyagement and customershyrelationship manshyagement (CRM)

As for platforms there are already plenshyty in dierent shapes and sizes For entershyprise applications SAP has built one calledNetweaver Oracle oers something simishylar called Fusion Last year Salesforcelaunched a platform as a service allowshying other rms to use the plumbing thatsupports its own CRM oering

More recently platforms for consumerservices have been proliferating Faceshybook a social network was the rst to beshycome one in 2007 Other big online rmshave followed suit or will do so soon Gooshygle with App Engine Yahoo with YOSand Microsoft with a cloud operating sysshytem thought to be called Windows StrataSome predict a platform war to rival theepic ghts between Microsoftrsquos Windowsand Applersquos Macintosh

Never say dieWhat shape will the software cloud takeother than being a vast collection of sershyvices In one way it will look much like theold software world There will be a few bigplatforms akin to todayrsquos operating sysshytems and most applications will be writshyten to one of these platforms

What is less clear is just how much ofbusiness and consumer software will mishygrate into the cloud and how fast The anshyswer depends on whom you ask Unsurshyprisingly Marc Benio Salesforcersquosfounder and chief executive argues thatweb applications will spell the death ofsoftware But people are not about tothrow out their powerful PCs or other clishyent devices if only because many ofthem still work oine at times Similarlycompanies will always want to keep someapplications inshyhouse for reasons of secushyrity regulation or simply to maintain conshytrol Ray Ozzie Microsoftrsquos chief softwarearchitect promotes something calledsoftware plus services meaning thatcustomers will settle on the right mix ofold and new stu

If history is any guide Mr Ozzie is moreon the mark Even the biggest changes in IThave never spelt the death of anythingnotes Josh Greenbaum of Enterprise Apshyplications Consulting IBM for instance isstill making money with mainframes

So the software cloud just like its hardshyware underpinnings will be very diverseBut how will people make use of this kindof computing 7

4Looming ever larger

Source Gartner

Within the enterprise application

markets daggerEstimate

Worldwide software-as-a-service revenue $bn

2005 06 07dagger 08 09 10 110

2

4

6

8

10

12

200

159

90

259

957

Compound annual growthrate 2006-2011

291

Content communications and collaborations

Enterprise-resource planning

Supply-chain management

Customer-relationship management

Office suites and digital-content creation

Others

F O R E C A S T

The Economist October 25th 2008 A special report on corporate IT 7

1

IT WILL take something with a lot morebang to replace a medium that is thoushy

sands of years old That was the prevailingreaction when Amazon last November anshynounced the launch of Kindle an electronshyic book reader the size of a paperback thatcan store more than 200 volumes Yet bythe end of this year Amazon will have soldnearly 380000 Kindles says Mark Mahashyney an analyst with Citigroup a bankTurns out the Kindle is becoming the iPodof the book world he recently wrote in anote to clients in a reference to Applersquosiconic music player

It is certainly not the Kindlersquos looks thatexplain its success Compared with theiPod its design looks very last centurySoftware and battery life too leave a lot tobe desired The chief attraction of the deshyvice is the ease with which it can be used tobuy books and other content Equippedwith a mobileshyphone modem the Kindlecan simply pull new reading material outof the air Users do not even have to have awireless service contract Our vision is tohave every book that has ever been inprint available in less than 60 seconds exshyplains Je Bezos Amazonrsquos boss

It remains to be seen whether the Kinshydle will become a cultural phenomenonlike the iPod of which around 160m havebeen sold so far Amazon for its part isdownplaying the Kindlersquos success and willnot conrm any sales estimates But it issafe to say that once the next generation ofwireless networks is up and running hunshydreds of millions of devices will come likethe Kindle with builtshyin radio connectivity(see chart 5) Digital cameras will automatishycally upload pictures Smart meters willsend readings of how much electricity ahouse consumes All kinds of sensors willbe able to send messages even things likedipsticks when tanks of liquid are low

The relationship of these devices tocloud computing may not be obvious Butif huge data centres and applications makeup the cloud itself then all the hardwareand software through which it connectsand communicates with the real world areits periphery In IT speak this is known asthe front end or client side

As the Kindle and other examplesshow this layer does not have much to do

with the user interface or client device ofold It will do a lot of computing itself Itwill come in all shapes and sizes dependshying on what the user wants to do And itwill not just distribute information as theweb does but collect it as well The analoshygy that springs to mind here is a theatreperformance with audience participationthe electronic cloud will adapt to whateverit engulfs

As you like itJust like computing itself the dominantuser interface has evolved continually Inthe days of the mainframe when computshyers and their peripherals lled entirerooms people communicated with thesemachines rst via punch cards and thenvia greenshyglowing monitors which weresimply dumb terminals Only with the riseof personal computers did the user intershyface become more intelligent responsiveand graphical

The rst version of the web was thus abrief step backward To be sure browsersbrought colour and graphics to the hithershyto textshybased internet but they were asdumb as the mainframe terminal This haschanged only in recent years A bundle ofwebshydevelopment techniques dubbedAJAX and multimedia software such asAdobersquos Flash and Microsoftrsquos Silverlightnow allow programmers to write what arecalled rich internet applications (RIA)

Whatever the buzzword the principleis much the same Servers no longer dishup simple hypertext markup language(HTML) the webrsquos early lingua franca Inshycreasingly web pages are bona de piecesof software that are executed in the browsshyer Users of Web 20 sites who venture intomenu items such as view source in theirbrowsers can sometimes see thousands oflines of code

In recent months the browser has beshycome even more of a platform for otherprograms akin to an operating systemsuch as Windows The main driver of thistrend is Google with its huge strength indistribution that can only gain from moreand more software being oered as a sershyvice In May 2007 the Silicon Valley rmlaunched Gears a program that allowsweb applications to be used oine and inSeptember this year it released a newbrowser called Chrome Its most imporshytant feature is that it can execute several soshyphisticated web applications at once

Although for now the internet browserwill remain the main vehicle for people tointeract with the cloud other forms arecoming to the fore One is the widget asnippet of code that often lives on a PCrsquosdesktop and allows the user to get a quickpersonalised view of a set of data The ideais that a salesperson for instance shouldnot have to re up an entire application forcustomershyrelationship management tond out which leads to follow up

More importantly there is now a greatshyer variety of hardware through which toaccess the cloud Already desktop and lapshytop computers are starting to lose their moshynopoly for surng the web as smaller deshyvices such as smart mobile phones andvarious forms of portable computers startto compete with them

Asus a Taiwanese computershymakerstarted the trend when it launched a smallcheap laptop called Eee a year ago Nowthere are dozens of these devices Gartnerreckons that 52m of these minishynoteshybooks will be sold this year 8m next andas many as 50m in 2012

Perhaps the best indicator of things tocome is Intel a huge chipmaker It made afortune selling processors for servers pershysonal computers and laptops In June the

On the periphery

The cloudrsquos communications with its clients will become ever more intelligent and interactive

5Chatterboxes

Source iSuppli

Worldwide shipments of electronic productswith built-in wireless capability bn

2003 04 05 06 07 08 09 10 11 120

05

10

15

20

25

30

Local-area

Products with embedded wireless networking

Wide-areaTotal cellularhandsets

F O R E C A S T

8 A special report on corporate IT The Economist October 25th 2008

2 rm launched a new line of chips calledAtom designed to power what it calls netshybooks and mobile internet devices(MIDs) mainly intended for surng theweb Intel is also the driving force behindWiMAX a technology for wireless broadshyband access to the internet It wants to puta WiMAX radio chip into as many devicesas possible from portable computers tospecialised gadgets such as the Kindle

Applersquos iPhone and its App Storewhich allows iPhone and iPod owners todownload applications also provide aforetaste of how important wireless deshyvices will be for the cloud Apple launchedApp Store only in July Two months later ithad already tallied 100m downloadsmeaning that it took o much faster thanApplersquos highly successful iTunes musicstore Many of the programs on oer conshynect to the cloud including news feedsmultishyplayer games and a service thatkeeps track of the latest polls for Americarsquospresidential election

You can take it with youThe plethora of devices wirelessly conshynected to the internet will speed up a shiftthat is already under way from a deviceshycentric to an informationshycentric worldin the words of VMwarersquos Paul Maritz Upin the cloud there will be a body of data foreach individual that will accompany themthrough life he explains and it will not betied to any particular device as it is today

Again what will make this possible is

virtualisationthis time of client devicesnot servers With the help of software fromVMware and others some rms have alshyready virtualised their employeesrsquo desktopcomputers which allows them to be manshyaged centrally Operating systems and apshyplications will no longer run only on theemployeersquos PC but on a virtual machine ina data centre that can be accessed remotelytheoretically from any PC in the worldSooner or later mobile devices will also beshycome virtualised Users will be able to usetheir applications and data on whichevergadget they have at hand

Yet the cloudrsquos interface is designed notmerely to provide information but to gathshyer it as well The future belongs to servicesthat respond in real time to informationprovided either by their users or by nonshyhuman sensors predicts Tim OrsquoReilly thefounder of OrsquoReilly Media a publisher oftechnology books who coined the termWeb 20 Such live applications hesays will get better the more data they areable to collectand there will be plenty asthe cloud expands

One of the rst examples of such a sershyvice was Google What originally put thesearch service ahead of the competitionwhen it was launched a decade ago was itsway of harvesting the information providshyed by web users in linking to other sitesthe more links point to a page the moreuseful it must be These days most links aregenerated by computers so the originalform of this page rank algorithm has

long since been scrapped But Googlersquos apshyproach is still the same mining informashytion provided by web users such as theirsearch histories to provide more relevantsearch results and more eective and tarshygeted advertising

The direct link to users also allows rmssuch as Google continuously to improvetheir interface something traditional softshywareshymakers were not able to do At anygiven time Google is running dozens oftests to optimise the look and feel of its ofshyferings This makes web applications farless technologyshydriven and much moreusershyoriented says IBMrsquos Mr WladawskyshyBerger They are much more inspired bywhat goes on in the real world

A raft of startshyups is also trying to builda business by observing its users in eectturning them into human sensors One isWesabe (in which Mr OrsquoReilly has investshyed) At rst sight it looks much like any pershysonalshynance site that allows users to seetheir bank account and creditshycard inforshymation in one place But behind the scenesthe service is also sifting through its memshybersrsquo anonymised data to nd patterns andto oer recommendations for future transshyactions based for instance on how much aparticular customer regularly spends in asupermarket Wireless devices too will inshycreasingly become sensors that feed intothe cloud and adapt to new information

Nokia for its part is planning to buildall kinds of sensors into mobile phones tomonitor things like movement barometricpressure or even the ownerrsquos healthwhich many experts expect to become abig new trend Sensors could also be usedto record peoplersquos activities creating whatsome already term a lifelograising allkinds of privacy concerns

As wireless technology gets better andcheaper more and more dierent kinds ofobjects will connect directly to the cloudSAP the German softwareshymaker haslaunched a research project called The Inshyternet of Things to see what can be donewith the resulting information As part ofthat project an initiative called the FutureFactory is now under way to investigatehow intelligent tags can make manufacturshying more adaptive and ecient

More and more data get you only so farhowever In the end Googlersquos search reshysults and its textshybased online advertiseshyments are relevant to users only becausethe rm has devised clever ways to siftthrough them says Hal Varian the rmrsquoschief economist The big challenge of thecloud will be to connect the myriad data init and make them protable 7

The Economist October 25th 2008 A special report on corporate IT 9

1

EVEN elephants can die In 1993 extincshytion came close for IBM then the

worldrsquos largest computershymaker (it hassince been overtaken by HP) Its mainshyframe business was collapsing and protswere plummeting At that point LouisGerstner took over as chief executive andmanaged to turn the company aroundOnly a handful of people understandhow precariously close IBM came to runshyning out of cash in 1993 he writes in hismemoir Who Says Elephants CanrsquotDance Whether we would have had tole for bankruptcy I canrsquot say

There are many reasons why IBM nearshyly went bellyshyup not least the fact that BigBlue had become a bureaucratic monsterBut most critically it had failed to adapt tothe industryrsquos rst big platform shiftwhich only really made itself felt in the earshyly 1990s the move from mainframes tosmaller machines rst soshycalled minicomshyputers then personal computers IBMwas slow very slow in delivering distrishybuted computing and many small compashynies moved in to ll the gap Mr Gerstnerwrites

It is unlikely that the move into thecloud will produce a similar nearshydeath exshyperience or even a real casualtyif only beshycause IBM still stands as a warning Butthat does not mean that the structure of theIT industry will remain unchanged northat the economics will stay the sameOnce the IT sky really clouds over individshy

ual rmsrsquo share of the global IT budget (seechart 6) will shift

The move to distributed computingwhich started in the midshy1980s led to a bigchange in the IT industry In the era of themainframe computing came in a verticallyintegrated package mainly from IBM Withdistributed computing the industry beshycame a stack of horizontal layers In corshyporate IT these were mainly hardware thenetwork infrastructure software (such asoperating systems and databases) entershyprise applications and IT services

Not all of these layers were createdequal Computershymakers commanded athicker one for instance but software comshypanies were more protable The key proshygram was the operating system both onservers and on personal computers (clishyents) It was the standard to which othercomponents of IT systems had to conformUsually this was a version of Windowswhich made Microsoft the IBM of this newera of computing

Cloud computing is unlikely to bringabout quite such a dramatic shift In esshysence what it does is take the idea of distrishybuted computing a step farther Still it willadd a couple of layers to the IT stack One ismade up of the cloud providers such asAmazon and Google The other is softwarethat helps rms to turn their IT infrastrucshyture into their own cloud known as a virshytual operating system for data centres

Drawing a neat diagram of the IT stack

will also become increasingly dicult beshycause the layers are becoming less distinctIn a world of services it often does notmake sense to think of hardware and softshyware separately argues Padmasree Warshyrior the chief technology ocer of CiscoBoth need to be blended to oer new sershyvices she says

Mix and matchEven though the IT stack may not changeall that much the perceived value of thedierent layers will shift and with it theamount of prot IT rms can make fromeach of them Who will lose and who willwin depends on how much of computing

Highs and lows

As IT gets cloudier the economics of the business will change

6Follow the money

Source Gartner Forecast

Worldwide end-user spending $trn

2006 07 08 090

1

2

3

4

Computer hardware

Software

IT services

Telecomsequipment

Telecoms services

10 A special report on corporate IT The Economist October 25th 2008

2

1

eventually moves into the cloud In the rst round almost everybody in

the IT industry will do well as the cloudsare being built The biggest winners arelikely to be hardwareshymakers says MarkStahlman of Gartner Hardware alwayswins when new demand for computing isuncovered And we havenrsquot had such asweeping global demand since the 1990s

But in the longer term there will be relashytive winners and losers The hardwarebusiness could actually nd itself in thelosing group Its margins could getsqueezed as cloud computing matures beshycause there will be fewer customers withmore buying power says James Staten ofForrester Research Large cloud providerscan dictate how to build servers and atwhat price he notes

All that may explain why hardwareshymakers were among the rst to jump onthe cloudshycomputing bandwagon So farthey have done only what Mr Staten callscloudshywashing relabelling existing proshyducts that help customers build a moreexible IT infrastructure But they are alsopreparing for a time when more moneycan be made building clouds than buildingcomputers IBM and HP for instance haveteamed up with other rms and universishyties to design new cloud architectures

Which side of the fenceIn the long run says Mr Staten hardwareshymakers may be torn between supplyingcloud providers or becoming providersthemselves Being both will not be easybecause the rms would be competingwith their biggest customers Dell seems tohave decided to be a cloud supplier SunMicrosystems is a candidate to become aprovider it is oering a cloudshylike servicecalled Networkcom albeit not very sucshycessfully HP and IBM already used to thebalancing act of selling hardware and proshyviding IT services will try to do both

Makers of traditional software will ndthe going even tougher With the advent ofopenshysource software in particular Linuxselling operating systems had already beshycome less protable In a virtual worldthey will become even more commodishytised which is bad news for MicrosoftMany business applications no longerneed a big generalshypurpose server operatshying system but can use a specialised onewhich should put pressure on prices Onclient computers more and more applicashytions are written to run in browsers not onany particular operating system

Makers of business applications arealso on the defensive Traditionally they

have made billions by selling their proshygrams often demanding hefty sums to inshystall them and then charging an annualmaintenance fee for upgrades and technishycal support But this highly lucrative busishyness model has come under increasingpressure says Michael Cusumano a proshyfessor at the Massachusetts Institute ofTechnology (MIT)

For one he says software vendors willhave to nd new ways to charge for theirwares in the cloud tying licensing fees tothe number of users for instance will bedicult since services will mostly be conshysumed by other machines More imporshytantly the corporate world has becomeless and less willing to buy software forlarge sums of money so software rms listshyed on Americarsquos stockmarkets now makemost of their prots from maintenanceand other services (see chart 7) SAP will inshycrease its annual maintenance fees to atleast 22 of a programrsquos value over thenext few years in line with those of Oracleits main rival

Yet the biggest challenge for softwarerms is to become providers of online sershyvices themselves says Brent Thill of Citi Inshyvestment Research So far they havemoved slowly oering SaaS only on theside if at all This was partly because theircustomers were not that keen But moreimportantly notes Mr Thill the softwarehouses are still wedded to their old busishyness model With SaaS they do not get a bigupfront payment only subscription fees

Once Salesforce and NetSuite hadshown that the SaaS model works the inshycumbents began to move faster In Septemshyber last year for instance SAP presentedBusiness ByDesign a package of webshybased enterprise applications for smallerbusinesses But success will not come easishyly SAP has slowed down the introductionof the new service because it still needs towork out how to run it cheaply enough tomake a reasonable prot

Pure SaaS providers also have a lot ontheir minds Some experts such as JoshuaGreenbaum of Enterprise ApplicationsConsulting reckon that few will ever be asprotable as traditional software rms Alshythough it is almost a decade old Salesforcestarted making money only in 2006 mainshyly because it rst had to spend heavily onmarketing to attract customers But nowthat the service has 1m users and revenuesof more than $1 billion these costs willcome down says the rm

The companies that have the bestchance of making money from the cloudare those that get things to connect and

work together and help customers movetheir computing around This is music tothe ears of big IT rms not least IBM Nearshyly 80 of its revenues come from infrashystructure software and IT services which itcan oer globally HP is catching up havingtaken over EDS another big ITshyservicesrm Both Microsoft and SAP for their partbelieve that rms will want to have achoice in where to do their computing aswell as the exibility to move thingsaround over time

Two potentially important contestantsare rarely mentioned Cisco and EMC theleading makers of networking and storagegear respectively Having invested a lot insoftware and services Cisco has becomemore than just the source of most of theworldrsquos routers the trac cops of the intershynet It is betting that in the cloud the netshywork layer will become more importantfor instance to ensure that computingworkloads are able to move around seshycurely EMC for its part has made two dozshyen cloudshyrelated investments andlaunched a cloudshyinfrastructure division

Whoever manages to own the domishynant operating system for the data centrecould become a big winner VMware isbound to have a shot at this As well as beshying the market leader in virtualisation ithas the support of EMC which holds 86of the rm But the competition is likely tobe intense

Will this prospective platform war proshyduce a dominant company in the mould ofIBM or Microsoft that is able to extractmore than its fair share of the prots Probshyably not because it will be relatively easyto switch between vendors says GeorgeGilbert of Tech Strategy Partners a consulshytancy Nor is it likely that one rm willmanage to build a global cloud monopolyAlthough there are important economiesof scale in building a network of data censhy

7Serving up a treat

Source Michael Cusumano

Massachusetts Institute of Technology

US-listed software-firmsrsquo sales of total

1990 92 94 96 98 02 042000 06

03

04

05

06

07

Services

Products

The Economist October 25th 2008 A special report on corporate IT 11

2

1

BUSINESSES as well as most organishysations outside the business world

begin to shift from hierarchical processesto networked ones Nearly every facet ofhuman activity is transformed in someway by the emergent fabric of interconnecshytion This reorganisation leads to dramaticimprovements in eciency and producshytivity So said Wired magazine the centralorgan of Web 10 in July 1997 in an essay enshytitled The Long Boom arguing that theworld was in for 25 years of prosperityfreedom and a better environment Backthen the article reected the general optishy

mism that led up to the internet bubbleNow after two busts several wars andgrowing fears of global warming it makesfor somewhat surreal reading

The cloud lends itself to similar hypershybole Yet so far there has not been much deshybate about its economic falloutprobablybecause the new economy ended badlyand the newest one is currently doing evenworse There will be many ways in whichthe cloud will change businesses and theeconomy most of them hard to predict butone theme is already emerging Businessesare becoming more like the technology itshy

self more adaptable more interwovenand more specialised These developshyments may not be new but cloud computshying will speed them up

Corporate IT has always promised tomake companies more agile In the 1990smany companies reshyengineered their busishyness processes when they started using aform of software called enterpriseshyreshysource planning (ERP) which does thingssuch as managing a rmrsquos nances andemployees But once these massive softshyware packages were in place it was exceedshyingly dicult to change them Implementshy

The long nimbus

The cloud will make businesses more adaptable interconnected and specialisedand often smaller

tres the computing needs of companiesand consumers vary too widely for onesize to t all

Even if the cloud is likely to transformthe IT industry some things will stay thesame One is the importance of lockshyin Ifanything companies and developers willbe even more dependent on cloud platshyforms and applications than they are onthe old kind SaaS promotes the hollowshying out of IT a rm that needs to migrateto another system will no longer have therequired expertise When Facebook saymakes a change to its platform developershave no choice but to go along with itSome are already calling for a CloudComputing Consortium in the mould ofthe World Wide Web Consortium (W3C)to set standards that allow applications tomigrate easily from one platform to anothshyer One standard initiative called OpenshySocial already allows the same webshybased application to run in several socialnetworks which are also clouds of sorts

But standards go only so far Some fearthat one company could try to monopoliseother key parts of the cloud ironically Mishycrosoft worries that Google is doing exactshyly that with the online advertising marketTo Steve Ballmer Microsoftrsquos boss Gooshyglersquos advertising platform is like a ywheelthat picks up speed as more websites atshytract more advertisers and vice versa

Eric Schmidt Googlersquos chief executivedenies any evil intent to achieve worlddomination He argues with some justicethat it would be hard for Google to controlthe cloud if only for technical reasonsmuch of it is already based on open stanshy

dards and its loose structure does not lenditself to locking customers in

Mr Schmidt promises that Google willnot lock its users in either Our competishytive advantage is not from lockshyin he saysbut from having specialised knowledgeof how to build data centres and how tobuild new software that is not reproducshyible such as our search algorithm This ishow we make our money

Yet Google is more like Microsoft than itlikes to admit says Nicholas Carr a techshynology writer and blogger Microsoft heargues achieved its dominant position inthe PC world not least by commoditising

products such as the browser that arecomplementary to its cash cows such asWindows as their cost came down deshymand for Microsoftrsquos products went up

Similarly Googlersquos natural instinct is todo its utmost to encourage people to spendmore time online because that will givethe company more opportunities to selladvertisements and collect data aboutthem According to Mr Carr almost everyshything the company doesbuilding hugedata centres ghting copyright restrictionsdigitising the worldrsquos libraries developinga new browser and most recently evenhelping to launch satellitesis aimed at inshycreasing the use of the internet Googlewants information to be free he recentlywrote in his blog because as the cost of inshyformation falls it makes more money

But Google may never become as powshyerful as Microsoft because regulators areunlikely to let it Microsoft was eventuallyput in the dock for abusing its monopolybecause it got too greedy pushing most ofthe rest of the industry to complain Giventhat the world has already lived throughthe Microsoft drama and that Google willaect many more industries the searchcompany is likely to be restrained muchearlier The rm is currently in negotiationswith the US Justice Department about acontroversial advertising partnership beshytween itself and one of its competitors Yashyhoo which would further strengthenGooglersquos position in online advertising

Even if the economics of the cloud arestill in ux though it is already clear that itwill have farshyreaching implications forbusinesses and for society as a whole 7

12 A special report on corporate IT The Economist October 25th 2008

2

1

ing SAP the market leader in ERP is likepouring concrete into your company goesan old joke among IT types

This helps to explain why in manyrms IT departments and business unitshave traditionally been at loggerheads Inrecent years tensions have worsenedCompanies must grapple with evershychangshying markets and regulations yet IT budgetsare being cut Many rms now have a hugebacklog of IT projects

Hence the interest in cloud computingIt turns capital expenditure into operationshyal expenditure which makes things mucheasier and cheaper Instead of having toshell out a lot of money for say a server totest an application and even with luckwait a few weeks for it to be up and runshyning managers just have to whip out acredit card open an account at AmazonWeb Services (AWS) and re up a virtualmachine for a few dollars

In many rms senior managers probashybly do not even know that business unitsare using AWS or similar services In someorganisations however it has already beshycome a muchshyappreciated RampD tool Pharshymaceutical companies for instance areregularly tapping into AWS to calculatesimulations Sogeti a European consultanshycy has used a cloud built by IBM to allow itto test new ideas and quickly put togetheran IT system for a companyshywide brainshystorming event

Cloud services have also been hugelysuccessful with startshyups which can nowenjoy infrastructure of the same quality aslarge companies In fact AWS is probablythe main reason why there are now somany rms oering all kinds of Web 20services Their usefulness may sometimesbe hard to gauge but that is a good thing Itis a sign of lively combinatorial innovashytion made possible because entrepreshyneurs can cheaply try new combinationsof technology says Googlersquos Mr Varian

Many startshyups would probably noteven exist without the cloud Take Anishymoto a service that lets users turn photosinto artsy music videos using articial inshytelligence When it launched on Facebooka social network demand was such that ithad to increase the number of its virtualmachines on AWS from 50 to 3500 withinthree days You could give me unlimitedfunding says Adam Selipsky of AWSand I wouldnrsquot know how to deploy thatmany servers in 72 hours

Combinatorial innovation should alsobe made easier by the fact that the cloudwill be a huge collection of electronic sershyvices based on standards But this serviceshy

oriented architecture will be even moreimportant for existing rms because itshould free their inner workingstheirbusiness processesfrom the straitjacketof their ERP systems and allow these proshycesses to be more easily adapted for inshystance to launch a new product

Again the software industry has beenpromising this for some years under thebanner of serviceshyoriented architecturediscussed in an earlier chapter Yet theadoption of SOA has been slow and manyprojects have failed says Chris Howard ofthe Burton Group a consultancy The reashysons are not just technical but cultural forexample some business units are not usedto sharing data Cloud computing will helpresolve some of these problems Manywebshybased services are built to be integratshyed into existing business processes

Donrsquot do it yourselfWhat eect will all this have on the natureof the rm If IT systems really allow comshypanies to become more modular and exshyible this should foster further specialisashytion It will become even easier tooutsource business processes or at leastthose parts of them where rms do not enshyjoy a competitive advantage Companieswill increasingly focus on their core andshed the context in the words of Geofshyfrey Moore managing director of TCG Adshy

visors a consultancyThis also means that companies will

rely more on services provided by othersThey will increasingly form process netshyworks a term for loosely connectedgroupings of specialised rms coined byJohn Hagel a business strategist at Deloitteamp Touche an auditing rm His prime exshyample is Li amp Fung a company based inHong Kong that has assembled a globalprocess network of nearly 10000 businesspartners in the clothing industry fromwhich it puts together customised supplychains for clothes designers

Both trends could mean that in futurehuge cloudswhich might be called inshydustry operating systemswill providebasic services for a particular sector for inshystance nance or logistics On top of thesesystems will sit many specialised and inshyterconnected rms just like applicationson a computing platform Yet this is onlyhalf the story The cloud changes not onlythe plumbing and structure of rms andindustries known as the transactionallayer but also their interactional layera term coined by Andy Mulholland chieftechnologist of Capgemini a consultancyHe denes this as the environment whereall the interactions between people takeplace both within an organisation andwith its business partners

Despite all the technology that has enshy

The Economist October 25th 2008 A special report on corporate IT 13

2

1

READERS may be excused if they havenever heard of Kinakuta It is a tiny isshy

land dreamed up by Neal Stephenson inhis novel Cryptonomicon In the scishyenceshyction classic libertarian technoloshygists and entrepreneurs try to turn it into adata haven for such things as anonymousonline banking and electronic money

Reality has indeed caught up with fanshytasy Iceland is about to become a Kinakuta

of sorts Data Islandia a local company istrying to establish the island as a vault for agrowing pile of data that rms must retainin order to comply with all kinds of regulashytions It has a compelling pitch With itscool climate abundant geothermal energyand secure remoteness Iceland appears tobe a prime location for data archives

As often however truth is strangerthan ction In a way Data Islandia is erectshy

ing borders in the cloud it intends to storeEuropean data according to European regshyulation and American bits according toAmerican rules What is more to keep thedata safe during transport they are pickedup with a data scooter (in essence a conshytainer lled with disk drives) and taken toIceland by aeroplaneas though breshyopshytic links had never been invented

This illustrates the political tensions

Computers without borders

The cloud may be the ultimate form of globalisation

tered the workplace in recent years so farthis layer has not really changed PCs cershytainly made people more productive butmost of their programs were not designedfor collaboration The enterprise applicashytions they worked with were still centralshyised systems And eshymail has in some waysmade things worse as the ood of messhysages takes up lots of time and attention

The dominant model is still that peoplerst labour individually and then mergetheir respective eorts says Mr Mulholshyland Itrsquos not much dierent from the ageof paper he writes in his book Mesh Colshylaboration Collaboration often meanspulling up your chair next to your colshyleague so you can look at the same screen

Consumers have pulled ahead of comshypanies in using cloudshybased services thatallow for better collaboration such asblogs wikis and social networks The rstgeneration of people that has grown up usshying all these tools is now entering theworkforce Being used to a culture of sharshying information freely these digital nashytives will be impatient with the rules oftraditional corporate IT

So it is helpful that rms have at last beshygun to embrace Web 20 technologies inearnest a trend predictably called Entershyprise 20 By 2013 companies around theglobe will spend $46 billion on such toolsaccording to Forrester Research What noshybody knows is how rms will trade o theadvantages of letting employees collaboshyrate with the outside world against the asshysociated risks for instance that condenshytial information is leaked Because of suchsecurity concerns (see chart 8) many rmsblock access to such sites as Facebook oncompany computers

Companies may not have much choicebut to open up says Mr Mulholland Emshy

ployees will increasingly resist constraintson their use of technology and they willhave a growing need to reach beyond thecorporate rewall Twenty years ago he arshygues 80 of the knowledge that workersrequired to do their jobs resided withintheir company Now it is only 20 becausethe world is changing ever faster We needto be open to new and unknown connecshytions with people and content he says

Exploiting the mesh in the words ofMr Mulholland will also mean that emshyployees may build simple applications oftheir own that allow them quickly to autoshymate repeat tasks using internal and extershynal IT services A new product by SerenaSoftware called Mashup Composer gives aforetaste of things to come Using a visualinterface even the not so technically mindshyed can quickly put together a service todeal say with travel requests or approvedocuments

Yet the impact of the cloud will also befelt on a macroeconomic level Just as itmakes small rms more competitive itwill help developing economies to move

ahead The biggest promise is that it willmake computing cheaper and easier touseand thus allow it to penetrate newmarkets says Russ Daniels chief technolshyogy ocer for HPrsquos cloudshyservices strategy

Hop skip and jumpThe mobile phone has already enabled deshyveloping countries to skip xedshyline netshyworks Cloud computing could prove to bea similar leapfrog technology because itdispenses with the need to build a cumbershysome IT infrastructure Software developshyers from a developing country can buildjust as great an application on our platformas somebody who lives in Palo Alto saysMr Benio of Salesforce

Indeed countries such as India will cershytainly take a big chunk of the global marketfor cloud services Zoho a popular suite ofwebshybased applications is operated by anIndian company AdventNet Indian hospishytals are already oering specialised healthshycare services this way The insurance armof ICICI an Indian bank has used thetechnology to come up with innovativeservices such as a personalised insurancefor diabetes Premiums are adjusted deshypending on how well policyholders stickto a tness plan All this suggests that theeconomic impact of the cloud may be feltnot only in the IT industry itself but in othshyer sectors too The internet disrupted themusic business Google disrupted the meshydia cloudshybased companies could becomedisrupters in other inecient industriesBuzzwords such as Health Care 20Banking 20 or even Education 20could soon acquire real meaning

But given that the cloud is global by nashyture how might it be regulated The conshyclusion of this special report will oersome answers 7

8Dangers within

Source Forrester

Research

How IT organisations feel about risk ofemployee-driven unsanctioned use of Web 20June 2008

Survey of 242 US IT decision-makers

at companies with 500+ employees

0 10 20 30 40 50

Very concerned

Somewhat concerned

Somewhat unconcerned

Completely unconcerned

14 A special report on corporate IT The Economist October 25th 2008

2

Previous special reports and a list offorthcoming ones can be found online

wwweconomistcomspecialreports

Future special reportsCountries and regionsSpain November 8thRussia November 29thIndia December 13th

Business nance economics and ideasCars in the developing world November 15th The sea January 3rd 2009The future of nance Jan 31st 2009

wwweconomistcomrights

Oer to readersReprints of this special report are available at aprice of pound350 plus postage and packing A minimum order of ve copies is required

Corporate oerCustomisation options on corporate orders of 100or more are available Please contact us to discussyour requirements

Send all orders to

The Rights and Syndication Department26 Red Lion SquareLondon WC1R 4HQ

Tel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492eshymail rightseconomistcom

For more information and to order special reportsand reprints online please visit our website

that will arise with the cloud In one way itis the ultimate form of globalisation vastvirtualised computer systems and elecshytronic services know no borders Yet govshyernments are likely to go to great lengths toavoid losing even more control

When the internet went mainstream inthe late 1990s libertarian thinkers arguedthat cyberspace was a distinct place callingfor laws and legal institutions of its ownAfter all they said it was built in such away that it interprets censorship as damshyage and routes around it But many govshyernments quickly found ways to blockcontent they deemed oensive Just look atChina and its great rewall

Controlling where data are stored andhow they are treated is harder though beshycause information can oat freely in thecloud And it is not just undemocratic govshyernments that want to control their citishyzensrsquo and companiesrsquo data indeed thereare nearly as many sets of data regulationas there are countries If we wanted to beon the safe side in terms of regulation weprobably would need 95 individual datacentres says Chuck Hollis a technologistat EMC the leading maker of storage gearwhich owns Mozy a cloud service that alshylows users to back up their data

There are technological xes to this proshyblem too Customers of Amazonrsquos storageservice for instance can have their datakept either in an American or a Europeandata centre In future cloud providers willoer many more options for where dataare kept and how they are protected Itseems possible that data as well as content

will eventually travel with security locashytion and expiry policies attached

It is when computers become virtualmachines that things get really trickyThese days IT systems are at the core ofmany companiesand just like data thesesystems can now live in a variety of placesWhat happens if they start to migrate toanother country where power is cheaperor regulation laxer Similarly if servicesare a combination of elements provided indierent jurisdictions who is liable ifsomething goes wrong

The cloudrsquos potential political and soshycial eect is only now entering the publicdebate IT rms are putting it on the agendaon both sides of the Atlantic In midshySepshytember for instance Google organised adiscussion on the subject in WashingtonDC A few days later SAP presented a whitepaper in Brussels pointing out that policyshymakers are not aware of the dramatic ecoshynomic impact of the Future Internet asthe paper calls the cloud

IT industry leaders note that ocialsfrom many countries have begun to takean interest in the cloud Some just wantdata centres to be built in their country tocreate jobs others are concerned about isshysues of law enforcement and jurisdictionThe danger they say is that cloud providshyers might be obliged to build more datacentres than are needed and have to comshyply with many dierent regulatory reshygimes Some of them have been oatingthe idea of freeshytrade zones for data censhytres where common rules would apply

Yet such ideas appear at odds with anshyother big question that could keep thecloud from growing how to protect prishyvacy Consumers expect their informashy

tion will be treated the same way on thecloud as if it were stored at home on theirown computers says Ari Schwartz of theCenter for Democracy and Technology anadvocacy group Many of the devices thatfeed into it such as sensors and cameraswill be intrusive For example Googlersquosvans go round taking streetshybyshystreet picshytures of cities for the companyrsquos onlinemap service called Streetview The picshytures are meant to help people nd theirway around but also often show passshyersshyby in embarrassing situations To proshytect their identity Google now blurs theirfaces and licence plates

Hands o my dataBut it is not only personal information thatcould get out into the open Privacy is aworry for companies tooand not just beshycause criminals or spies might intercepttheir data Once they are in the cloud govshyernments can also get their hands on themmore easily SWIFT the organisation thatmanages international bank transfers isplanning to build a data centre in neutralSwitzerland That will allow it to keep dataabout European transfers on the old contishynent where it cannot be subpoenaed bythe American government Webshybased eshymail is not safe either Thanks to the StoredCommunications Act American law enshyforcers can read peoplersquos messagesanddo not even have to tell the recipient

Just as too much regulation may keepthe cloud from rising high so could lack ofprivacy If consumers and companies canshynot be sure that their information is safethey will err on the side of caution But deshyspite all the caveats the precipitation fromthe cloud will be huge 7

6 A special report on corporate IT The Economist October 25th 2008

2 Think back to the gastronomic examshyple A precooked meal is hard to changeand so are traditional software applicashytions By contrast a restaurant can easilychange its menu and its style of operationSimilarly SOAshybased software allowscompanies to alter their business processshyes such as the way they handle orders tocollect cash

SAP a German software rm was oneof the rst companies to put this serviceshyoriented architecture front and centreStarting in 2003 it developed among othshyer things a new corporateshysoftware packshyage that did away with monolithic applicashytions such as programs to keep track of acompanyrsquos nances or manage its relationshyship with customers Instead it introduceda collection of reshyusable components thatcould be strung together at will

IBM too is a fan of SOA and web sershyvices But its approach is somewhat diershyent given that it does not sell business apshyplications but makes most of its moneyfrom IT services and software to managethe underlying computing infrastructureIBM uses SOA mainly to help rms inteshygrate their increasingly complex and dispashyrate IT systems Its software turns theminto a collection of services that can bewoven into business processes

The approaches may be dierent butthe vision is the same to create IT systemsthat adapt to the business needs of compashynies and allow them to connect When Iwant to do something new explainsSteve Mills the boss of IBMrsquos softwaregroup I do not need to build a new applishycation but can use the pieces I alreadyhave To Peter Zencke who led the develshyopment of SAPrsquos new package its most exshyciting feature is that any of the processcomponents can now become a serviceprovided by some other rm

Despite millions of dollars spent onmarketing SOA it has not really taken oyet But many webshybased applications forconsumers rely on this concept The primeexample is Google Maps When the onlinegiant launched the service programmersquickly gured out how to mix the mapswith other sources of information This ishow for example Housingmapscom wascreated a combination of a Google mapwith the rental and sales listings fromCraigslist a website for classied ads Itwas one of the rst mashshyups as suchcombinations have come to be called

Since then the number of such mashshyups has exploded thanks mainly to sershyvices like Microsoftrsquos Popy and YahooPipes In essence these are graphical proshy

gramming tools Users drag and dropmodulesdata feeds providing such inshyformation as pictures headlines andsearch resultsand weave them together

Most of these mashshyups are still toysbut rms oering software as a servicehave started oering similar combinashytions In April Salesforcecom and Googleannounced that they would integrate theironline services Users of Salesforce whichhelps rms manage their customer relashytionships can now quickly switch to Gooshyglersquos webshybased applications

Smaller rms have already started toweave a network of services OpSource aSilicon Valley startshyup for instance proshyvides basic services for other SaaS rmsand web companies TriCipher anotherCalifornian newcomer authenticates usshyers of web applications Ribbit for its partallows these services to add voice commushynications to their oerings

Yet it is unlikely that the software cloudwill end up as a vast nebula of thousandsof specialised services Even creating a sershyviceshyoriented architecture is no silver bulshylet against complexity in a famous phraseby Frederick Brooks an elder of computerscience Although web services allow onshyline oerings to connect for instance it iscostly to synchronise their data And itwould not make sense for any rm to betits business on simple mashshyups

As software markets mature they tendto form two kinds of clumps integratedsuites of applications and platforms ontop of which others can build programsBoth forms are already emerging On theapplications side there is Google Apps and

Zoho which is even more comprehensiveIt encompasses a total of 18 applicationsincluding word processing project manshyagement and customershyrelationship manshyagement (CRM)

As for platforms there are already plenshyty in dierent shapes and sizes For entershyprise applications SAP has built one calledNetweaver Oracle oers something simishylar called Fusion Last year Salesforcelaunched a platform as a service allowshying other rms to use the plumbing thatsupports its own CRM oering

More recently platforms for consumerservices have been proliferating Faceshybook a social network was the rst to beshycome one in 2007 Other big online rmshave followed suit or will do so soon Gooshygle with App Engine Yahoo with YOSand Microsoft with a cloud operating sysshytem thought to be called Windows StrataSome predict a platform war to rival theepic ghts between Microsoftrsquos Windowsand Applersquos Macintosh

Never say dieWhat shape will the software cloud takeother than being a vast collection of sershyvices In one way it will look much like theold software world There will be a few bigplatforms akin to todayrsquos operating sysshytems and most applications will be writshyten to one of these platforms

What is less clear is just how much ofbusiness and consumer software will mishygrate into the cloud and how fast The anshyswer depends on whom you ask Unsurshyprisingly Marc Benio Salesforcersquosfounder and chief executive argues thatweb applications will spell the death ofsoftware But people are not about tothrow out their powerful PCs or other clishyent devices if only because many ofthem still work oine at times Similarlycompanies will always want to keep someapplications inshyhouse for reasons of secushyrity regulation or simply to maintain conshytrol Ray Ozzie Microsoftrsquos chief softwarearchitect promotes something calledsoftware plus services meaning thatcustomers will settle on the right mix ofold and new stu

If history is any guide Mr Ozzie is moreon the mark Even the biggest changes in IThave never spelt the death of anythingnotes Josh Greenbaum of Enterprise Apshyplications Consulting IBM for instance isstill making money with mainframes

So the software cloud just like its hardshyware underpinnings will be very diverseBut how will people make use of this kindof computing 7

4Looming ever larger

Source Gartner

Within the enterprise application

markets daggerEstimate

Worldwide software-as-a-service revenue $bn

2005 06 07dagger 08 09 10 110

2

4

6

8

10

12

200

159

90

259

957

Compound annual growthrate 2006-2011

291

Content communications and collaborations

Enterprise-resource planning

Supply-chain management

Customer-relationship management

Office suites and digital-content creation

Others

F O R E C A S T

The Economist October 25th 2008 A special report on corporate IT 7

1

IT WILL take something with a lot morebang to replace a medium that is thoushy

sands of years old That was the prevailingreaction when Amazon last November anshynounced the launch of Kindle an electronshyic book reader the size of a paperback thatcan store more than 200 volumes Yet bythe end of this year Amazon will have soldnearly 380000 Kindles says Mark Mahashyney an analyst with Citigroup a bankTurns out the Kindle is becoming the iPodof the book world he recently wrote in anote to clients in a reference to Applersquosiconic music player

It is certainly not the Kindlersquos looks thatexplain its success Compared with theiPod its design looks very last centurySoftware and battery life too leave a lot tobe desired The chief attraction of the deshyvice is the ease with which it can be used tobuy books and other content Equippedwith a mobileshyphone modem the Kindlecan simply pull new reading material outof the air Users do not even have to have awireless service contract Our vision is tohave every book that has ever been inprint available in less than 60 seconds exshyplains Je Bezos Amazonrsquos boss

It remains to be seen whether the Kinshydle will become a cultural phenomenonlike the iPod of which around 160m havebeen sold so far Amazon for its part isdownplaying the Kindlersquos success and willnot conrm any sales estimates But it issafe to say that once the next generation ofwireless networks is up and running hunshydreds of millions of devices will come likethe Kindle with builtshyin radio connectivity(see chart 5) Digital cameras will automatishycally upload pictures Smart meters willsend readings of how much electricity ahouse consumes All kinds of sensors willbe able to send messages even things likedipsticks when tanks of liquid are low

The relationship of these devices tocloud computing may not be obvious Butif huge data centres and applications makeup the cloud itself then all the hardwareand software through which it connectsand communicates with the real world areits periphery In IT speak this is known asthe front end or client side

As the Kindle and other examplesshow this layer does not have much to do

with the user interface or client device ofold It will do a lot of computing itself Itwill come in all shapes and sizes dependshying on what the user wants to do And itwill not just distribute information as theweb does but collect it as well The analoshygy that springs to mind here is a theatreperformance with audience participationthe electronic cloud will adapt to whateverit engulfs

As you like itJust like computing itself the dominantuser interface has evolved continually Inthe days of the mainframe when computshyers and their peripherals lled entirerooms people communicated with thesemachines rst via punch cards and thenvia greenshyglowing monitors which weresimply dumb terminals Only with the riseof personal computers did the user intershyface become more intelligent responsiveand graphical

The rst version of the web was thus abrief step backward To be sure browsersbrought colour and graphics to the hithershyto textshybased internet but they were asdumb as the mainframe terminal This haschanged only in recent years A bundle ofwebshydevelopment techniques dubbedAJAX and multimedia software such asAdobersquos Flash and Microsoftrsquos Silverlightnow allow programmers to write what arecalled rich internet applications (RIA)

Whatever the buzzword the principleis much the same Servers no longer dishup simple hypertext markup language(HTML) the webrsquos early lingua franca Inshycreasingly web pages are bona de piecesof software that are executed in the browsshyer Users of Web 20 sites who venture intomenu items such as view source in theirbrowsers can sometimes see thousands oflines of code

In recent months the browser has beshycome even more of a platform for otherprograms akin to an operating systemsuch as Windows The main driver of thistrend is Google with its huge strength indistribution that can only gain from moreand more software being oered as a sershyvice In May 2007 the Silicon Valley rmlaunched Gears a program that allowsweb applications to be used oine and inSeptember this year it released a newbrowser called Chrome Its most imporshytant feature is that it can execute several soshyphisticated web applications at once

Although for now the internet browserwill remain the main vehicle for people tointeract with the cloud other forms arecoming to the fore One is the widget asnippet of code that often lives on a PCrsquosdesktop and allows the user to get a quickpersonalised view of a set of data The ideais that a salesperson for instance shouldnot have to re up an entire application forcustomershyrelationship management tond out which leads to follow up

More importantly there is now a greatshyer variety of hardware through which toaccess the cloud Already desktop and lapshytop computers are starting to lose their moshynopoly for surng the web as smaller deshyvices such as smart mobile phones andvarious forms of portable computers startto compete with them

Asus a Taiwanese computershymakerstarted the trend when it launched a smallcheap laptop called Eee a year ago Nowthere are dozens of these devices Gartnerreckons that 52m of these minishynoteshybooks will be sold this year 8m next andas many as 50m in 2012

Perhaps the best indicator of things tocome is Intel a huge chipmaker It made afortune selling processors for servers pershysonal computers and laptops In June the

On the periphery

The cloudrsquos communications with its clients will become ever more intelligent and interactive

5Chatterboxes

Source iSuppli

Worldwide shipments of electronic productswith built-in wireless capability bn

2003 04 05 06 07 08 09 10 11 120

05

10

15

20

25

30

Local-area

Products with embedded wireless networking

Wide-areaTotal cellularhandsets

F O R E C A S T

8 A special report on corporate IT The Economist October 25th 2008

2 rm launched a new line of chips calledAtom designed to power what it calls netshybooks and mobile internet devices(MIDs) mainly intended for surng theweb Intel is also the driving force behindWiMAX a technology for wireless broadshyband access to the internet It wants to puta WiMAX radio chip into as many devicesas possible from portable computers tospecialised gadgets such as the Kindle

Applersquos iPhone and its App Storewhich allows iPhone and iPod owners todownload applications also provide aforetaste of how important wireless deshyvices will be for the cloud Apple launchedApp Store only in July Two months later ithad already tallied 100m downloadsmeaning that it took o much faster thanApplersquos highly successful iTunes musicstore Many of the programs on oer conshynect to the cloud including news feedsmultishyplayer games and a service thatkeeps track of the latest polls for Americarsquospresidential election

You can take it with youThe plethora of devices wirelessly conshynected to the internet will speed up a shiftthat is already under way from a deviceshycentric to an informationshycentric worldin the words of VMwarersquos Paul Maritz Upin the cloud there will be a body of data foreach individual that will accompany themthrough life he explains and it will not betied to any particular device as it is today

Again what will make this possible is

virtualisationthis time of client devicesnot servers With the help of software fromVMware and others some rms have alshyready virtualised their employeesrsquo desktopcomputers which allows them to be manshyaged centrally Operating systems and apshyplications will no longer run only on theemployeersquos PC but on a virtual machine ina data centre that can be accessed remotelytheoretically from any PC in the worldSooner or later mobile devices will also beshycome virtualised Users will be able to usetheir applications and data on whichevergadget they have at hand

Yet the cloudrsquos interface is designed notmerely to provide information but to gathshyer it as well The future belongs to servicesthat respond in real time to informationprovided either by their users or by nonshyhuman sensors predicts Tim OrsquoReilly thefounder of OrsquoReilly Media a publisher oftechnology books who coined the termWeb 20 Such live applications hesays will get better the more data they areable to collectand there will be plenty asthe cloud expands

One of the rst examples of such a sershyvice was Google What originally put thesearch service ahead of the competitionwhen it was launched a decade ago was itsway of harvesting the information providshyed by web users in linking to other sitesthe more links point to a page the moreuseful it must be These days most links aregenerated by computers so the originalform of this page rank algorithm has

long since been scrapped But Googlersquos apshyproach is still the same mining informashytion provided by web users such as theirsearch histories to provide more relevantsearch results and more eective and tarshygeted advertising

The direct link to users also allows rmssuch as Google continuously to improvetheir interface something traditional softshywareshymakers were not able to do At anygiven time Google is running dozens oftests to optimise the look and feel of its ofshyferings This makes web applications farless technologyshydriven and much moreusershyoriented says IBMrsquos Mr WladawskyshyBerger They are much more inspired bywhat goes on in the real world

A raft of startshyups is also trying to builda business by observing its users in eectturning them into human sensors One isWesabe (in which Mr OrsquoReilly has investshyed) At rst sight it looks much like any pershysonalshynance site that allows users to seetheir bank account and creditshycard inforshymation in one place But behind the scenesthe service is also sifting through its memshybersrsquo anonymised data to nd patterns andto oer recommendations for future transshyactions based for instance on how much aparticular customer regularly spends in asupermarket Wireless devices too will inshycreasingly become sensors that feed intothe cloud and adapt to new information

Nokia for its part is planning to buildall kinds of sensors into mobile phones tomonitor things like movement barometricpressure or even the ownerrsquos healthwhich many experts expect to become abig new trend Sensors could also be usedto record peoplersquos activities creating whatsome already term a lifelograising allkinds of privacy concerns

As wireless technology gets better andcheaper more and more dierent kinds ofobjects will connect directly to the cloudSAP the German softwareshymaker haslaunched a research project called The Inshyternet of Things to see what can be donewith the resulting information As part ofthat project an initiative called the FutureFactory is now under way to investigatehow intelligent tags can make manufacturshying more adaptive and ecient

More and more data get you only so farhowever In the end Googlersquos search reshysults and its textshybased online advertiseshyments are relevant to users only becausethe rm has devised clever ways to siftthrough them says Hal Varian the rmrsquoschief economist The big challenge of thecloud will be to connect the myriad data init and make them protable 7

The Economist October 25th 2008 A special report on corporate IT 9

1

EVEN elephants can die In 1993 extincshytion came close for IBM then the

worldrsquos largest computershymaker (it hassince been overtaken by HP) Its mainshyframe business was collapsing and protswere plummeting At that point LouisGerstner took over as chief executive andmanaged to turn the company aroundOnly a handful of people understandhow precariously close IBM came to runshyning out of cash in 1993 he writes in hismemoir Who Says Elephants CanrsquotDance Whether we would have had tole for bankruptcy I canrsquot say

There are many reasons why IBM nearshyly went bellyshyup not least the fact that BigBlue had become a bureaucratic monsterBut most critically it had failed to adapt tothe industryrsquos rst big platform shiftwhich only really made itself felt in the earshyly 1990s the move from mainframes tosmaller machines rst soshycalled minicomshyputers then personal computers IBMwas slow very slow in delivering distrishybuted computing and many small compashynies moved in to ll the gap Mr Gerstnerwrites

It is unlikely that the move into thecloud will produce a similar nearshydeath exshyperience or even a real casualtyif only beshycause IBM still stands as a warning Butthat does not mean that the structure of theIT industry will remain unchanged northat the economics will stay the sameOnce the IT sky really clouds over individshy

ual rmsrsquo share of the global IT budget (seechart 6) will shift

The move to distributed computingwhich started in the midshy1980s led to a bigchange in the IT industry In the era of themainframe computing came in a verticallyintegrated package mainly from IBM Withdistributed computing the industry beshycame a stack of horizontal layers In corshyporate IT these were mainly hardware thenetwork infrastructure software (such asoperating systems and databases) entershyprise applications and IT services

Not all of these layers were createdequal Computershymakers commanded athicker one for instance but software comshypanies were more protable The key proshygram was the operating system both onservers and on personal computers (clishyents) It was the standard to which othercomponents of IT systems had to conformUsually this was a version of Windowswhich made Microsoft the IBM of this newera of computing

Cloud computing is unlikely to bringabout quite such a dramatic shift In esshysence what it does is take the idea of distrishybuted computing a step farther Still it willadd a couple of layers to the IT stack One ismade up of the cloud providers such asAmazon and Google The other is softwarethat helps rms to turn their IT infrastrucshyture into their own cloud known as a virshytual operating system for data centres

Drawing a neat diagram of the IT stack

will also become increasingly dicult beshycause the layers are becoming less distinctIn a world of services it often does notmake sense to think of hardware and softshyware separately argues Padmasree Warshyrior the chief technology ocer of CiscoBoth need to be blended to oer new sershyvices she says

Mix and matchEven though the IT stack may not changeall that much the perceived value of thedierent layers will shift and with it theamount of prot IT rms can make fromeach of them Who will lose and who willwin depends on how much of computing

Highs and lows

As IT gets cloudier the economics of the business will change

6Follow the money

Source Gartner Forecast

Worldwide end-user spending $trn

2006 07 08 090

1

2

3

4

Computer hardware

Software

IT services

Telecomsequipment

Telecoms services

10 A special report on corporate IT The Economist October 25th 2008

2

1

eventually moves into the cloud In the rst round almost everybody in

the IT industry will do well as the cloudsare being built The biggest winners arelikely to be hardwareshymakers says MarkStahlman of Gartner Hardware alwayswins when new demand for computing isuncovered And we havenrsquot had such asweeping global demand since the 1990s

But in the longer term there will be relashytive winners and losers The hardwarebusiness could actually nd itself in thelosing group Its margins could getsqueezed as cloud computing matures beshycause there will be fewer customers withmore buying power says James Staten ofForrester Research Large cloud providerscan dictate how to build servers and atwhat price he notes

All that may explain why hardwareshymakers were among the rst to jump onthe cloudshycomputing bandwagon So farthey have done only what Mr Staten callscloudshywashing relabelling existing proshyducts that help customers build a moreexible IT infrastructure But they are alsopreparing for a time when more moneycan be made building clouds than buildingcomputers IBM and HP for instance haveteamed up with other rms and universishyties to design new cloud architectures

Which side of the fenceIn the long run says Mr Staten hardwareshymakers may be torn between supplyingcloud providers or becoming providersthemselves Being both will not be easybecause the rms would be competingwith their biggest customers Dell seems tohave decided to be a cloud supplier SunMicrosystems is a candidate to become aprovider it is oering a cloudshylike servicecalled Networkcom albeit not very sucshycessfully HP and IBM already used to thebalancing act of selling hardware and proshyviding IT services will try to do both

Makers of traditional software will ndthe going even tougher With the advent ofopenshysource software in particular Linuxselling operating systems had already beshycome less protable In a virtual worldthey will become even more commodishytised which is bad news for MicrosoftMany business applications no longerneed a big generalshypurpose server operatshying system but can use a specialised onewhich should put pressure on prices Onclient computers more and more applicashytions are written to run in browsers not onany particular operating system

Makers of business applications arealso on the defensive Traditionally they

have made billions by selling their proshygrams often demanding hefty sums to inshystall them and then charging an annualmaintenance fee for upgrades and technishycal support But this highly lucrative busishyness model has come under increasingpressure says Michael Cusumano a proshyfessor at the Massachusetts Institute ofTechnology (MIT)

For one he says software vendors willhave to nd new ways to charge for theirwares in the cloud tying licensing fees tothe number of users for instance will bedicult since services will mostly be conshysumed by other machines More imporshytantly the corporate world has becomeless and less willing to buy software forlarge sums of money so software rms listshyed on Americarsquos stockmarkets now makemost of their prots from maintenanceand other services (see chart 7) SAP will inshycrease its annual maintenance fees to atleast 22 of a programrsquos value over thenext few years in line with those of Oracleits main rival

Yet the biggest challenge for softwarerms is to become providers of online sershyvices themselves says Brent Thill of Citi Inshyvestment Research So far they havemoved slowly oering SaaS only on theside if at all This was partly because theircustomers were not that keen But moreimportantly notes Mr Thill the softwarehouses are still wedded to their old busishyness model With SaaS they do not get a bigupfront payment only subscription fees

Once Salesforce and NetSuite hadshown that the SaaS model works the inshycumbents began to move faster In Septemshyber last year for instance SAP presentedBusiness ByDesign a package of webshybased enterprise applications for smallerbusinesses But success will not come easishyly SAP has slowed down the introductionof the new service because it still needs towork out how to run it cheaply enough tomake a reasonable prot

Pure SaaS providers also have a lot ontheir minds Some experts such as JoshuaGreenbaum of Enterprise ApplicationsConsulting reckon that few will ever be asprotable as traditional software rms Alshythough it is almost a decade old Salesforcestarted making money only in 2006 mainshyly because it rst had to spend heavily onmarketing to attract customers But nowthat the service has 1m users and revenuesof more than $1 billion these costs willcome down says the rm

The companies that have the bestchance of making money from the cloudare those that get things to connect and

work together and help customers movetheir computing around This is music tothe ears of big IT rms not least IBM Nearshyly 80 of its revenues come from infrashystructure software and IT services which itcan oer globally HP is catching up havingtaken over EDS another big ITshyservicesrm Both Microsoft and SAP for their partbelieve that rms will want to have achoice in where to do their computing aswell as the exibility to move thingsaround over time

Two potentially important contestantsare rarely mentioned Cisco and EMC theleading makers of networking and storagegear respectively Having invested a lot insoftware and services Cisco has becomemore than just the source of most of theworldrsquos routers the trac cops of the intershynet It is betting that in the cloud the netshywork layer will become more importantfor instance to ensure that computingworkloads are able to move around seshycurely EMC for its part has made two dozshyen cloudshyrelated investments andlaunched a cloudshyinfrastructure division

Whoever manages to own the domishynant operating system for the data centrecould become a big winner VMware isbound to have a shot at this As well as beshying the market leader in virtualisation ithas the support of EMC which holds 86of the rm But the competition is likely tobe intense

Will this prospective platform war proshyduce a dominant company in the mould ofIBM or Microsoft that is able to extractmore than its fair share of the prots Probshyably not because it will be relatively easyto switch between vendors says GeorgeGilbert of Tech Strategy Partners a consulshytancy Nor is it likely that one rm willmanage to build a global cloud monopolyAlthough there are important economiesof scale in building a network of data censhy

7Serving up a treat

Source Michael Cusumano

Massachusetts Institute of Technology

US-listed software-firmsrsquo sales of total

1990 92 94 96 98 02 042000 06

03

04

05

06

07

Services

Products

The Economist October 25th 2008 A special report on corporate IT 11

2

1

BUSINESSES as well as most organishysations outside the business world

begin to shift from hierarchical processesto networked ones Nearly every facet ofhuman activity is transformed in someway by the emergent fabric of interconnecshytion This reorganisation leads to dramaticimprovements in eciency and producshytivity So said Wired magazine the centralorgan of Web 10 in July 1997 in an essay enshytitled The Long Boom arguing that theworld was in for 25 years of prosperityfreedom and a better environment Backthen the article reected the general optishy

mism that led up to the internet bubbleNow after two busts several wars andgrowing fears of global warming it makesfor somewhat surreal reading

The cloud lends itself to similar hypershybole Yet so far there has not been much deshybate about its economic falloutprobablybecause the new economy ended badlyand the newest one is currently doing evenworse There will be many ways in whichthe cloud will change businesses and theeconomy most of them hard to predict butone theme is already emerging Businessesare becoming more like the technology itshy

self more adaptable more interwovenand more specialised These developshyments may not be new but cloud computshying will speed them up

Corporate IT has always promised tomake companies more agile In the 1990smany companies reshyengineered their busishyness processes when they started using aform of software called enterpriseshyreshysource planning (ERP) which does thingssuch as managing a rmrsquos nances andemployees But once these massive softshyware packages were in place it was exceedshyingly dicult to change them Implementshy

The long nimbus

The cloud will make businesses more adaptable interconnected and specialisedand often smaller

tres the computing needs of companiesand consumers vary too widely for onesize to t all

Even if the cloud is likely to transformthe IT industry some things will stay thesame One is the importance of lockshyin Ifanything companies and developers willbe even more dependent on cloud platshyforms and applications than they are onthe old kind SaaS promotes the hollowshying out of IT a rm that needs to migrateto another system will no longer have therequired expertise When Facebook saymakes a change to its platform developershave no choice but to go along with itSome are already calling for a CloudComputing Consortium in the mould ofthe World Wide Web Consortium (W3C)to set standards that allow applications tomigrate easily from one platform to anothshyer One standard initiative called OpenshySocial already allows the same webshybased application to run in several socialnetworks which are also clouds of sorts

But standards go only so far Some fearthat one company could try to monopoliseother key parts of the cloud ironically Mishycrosoft worries that Google is doing exactshyly that with the online advertising marketTo Steve Ballmer Microsoftrsquos boss Gooshyglersquos advertising platform is like a ywheelthat picks up speed as more websites atshytract more advertisers and vice versa

Eric Schmidt Googlersquos chief executivedenies any evil intent to achieve worlddomination He argues with some justicethat it would be hard for Google to controlthe cloud if only for technical reasonsmuch of it is already based on open stanshy

dards and its loose structure does not lenditself to locking customers in

Mr Schmidt promises that Google willnot lock its users in either Our competishytive advantage is not from lockshyin he saysbut from having specialised knowledgeof how to build data centres and how tobuild new software that is not reproducshyible such as our search algorithm This ishow we make our money

Yet Google is more like Microsoft than itlikes to admit says Nicholas Carr a techshynology writer and blogger Microsoft heargues achieved its dominant position inthe PC world not least by commoditising

products such as the browser that arecomplementary to its cash cows such asWindows as their cost came down deshymand for Microsoftrsquos products went up

Similarly Googlersquos natural instinct is todo its utmost to encourage people to spendmore time online because that will givethe company more opportunities to selladvertisements and collect data aboutthem According to Mr Carr almost everyshything the company doesbuilding hugedata centres ghting copyright restrictionsdigitising the worldrsquos libraries developinga new browser and most recently evenhelping to launch satellitesis aimed at inshycreasing the use of the internet Googlewants information to be free he recentlywrote in his blog because as the cost of inshyformation falls it makes more money

But Google may never become as powshyerful as Microsoft because regulators areunlikely to let it Microsoft was eventuallyput in the dock for abusing its monopolybecause it got too greedy pushing most ofthe rest of the industry to complain Giventhat the world has already lived throughthe Microsoft drama and that Google willaect many more industries the searchcompany is likely to be restrained muchearlier The rm is currently in negotiationswith the US Justice Department about acontroversial advertising partnership beshytween itself and one of its competitors Yashyhoo which would further strengthenGooglersquos position in online advertising

Even if the economics of the cloud arestill in ux though it is already clear that itwill have farshyreaching implications forbusinesses and for society as a whole 7

12 A special report on corporate IT The Economist October 25th 2008

2

1

ing SAP the market leader in ERP is likepouring concrete into your company goesan old joke among IT types

This helps to explain why in manyrms IT departments and business unitshave traditionally been at loggerheads Inrecent years tensions have worsenedCompanies must grapple with evershychangshying markets and regulations yet IT budgetsare being cut Many rms now have a hugebacklog of IT projects

Hence the interest in cloud computingIt turns capital expenditure into operationshyal expenditure which makes things mucheasier and cheaper Instead of having toshell out a lot of money for say a server totest an application and even with luckwait a few weeks for it to be up and runshyning managers just have to whip out acredit card open an account at AmazonWeb Services (AWS) and re up a virtualmachine for a few dollars

In many rms senior managers probashybly do not even know that business unitsare using AWS or similar services In someorganisations however it has already beshycome a muchshyappreciated RampD tool Pharshymaceutical companies for instance areregularly tapping into AWS to calculatesimulations Sogeti a European consultanshycy has used a cloud built by IBM to allow itto test new ideas and quickly put togetheran IT system for a companyshywide brainshystorming event

Cloud services have also been hugelysuccessful with startshyups which can nowenjoy infrastructure of the same quality aslarge companies In fact AWS is probablythe main reason why there are now somany rms oering all kinds of Web 20services Their usefulness may sometimesbe hard to gauge but that is a good thing Itis a sign of lively combinatorial innovashytion made possible because entrepreshyneurs can cheaply try new combinationsof technology says Googlersquos Mr Varian

Many startshyups would probably noteven exist without the cloud Take Anishymoto a service that lets users turn photosinto artsy music videos using articial inshytelligence When it launched on Facebooka social network demand was such that ithad to increase the number of its virtualmachines on AWS from 50 to 3500 withinthree days You could give me unlimitedfunding says Adam Selipsky of AWSand I wouldnrsquot know how to deploy thatmany servers in 72 hours

Combinatorial innovation should alsobe made easier by the fact that the cloudwill be a huge collection of electronic sershyvices based on standards But this serviceshy

oriented architecture will be even moreimportant for existing rms because itshould free their inner workingstheirbusiness processesfrom the straitjacketof their ERP systems and allow these proshycesses to be more easily adapted for inshystance to launch a new product

Again the software industry has beenpromising this for some years under thebanner of serviceshyoriented architecturediscussed in an earlier chapter Yet theadoption of SOA has been slow and manyprojects have failed says Chris Howard ofthe Burton Group a consultancy The reashysons are not just technical but cultural forexample some business units are not usedto sharing data Cloud computing will helpresolve some of these problems Manywebshybased services are built to be integratshyed into existing business processes

Donrsquot do it yourselfWhat eect will all this have on the natureof the rm If IT systems really allow comshypanies to become more modular and exshyible this should foster further specialisashytion It will become even easier tooutsource business processes or at leastthose parts of them where rms do not enshyjoy a competitive advantage Companieswill increasingly focus on their core andshed the context in the words of Geofshyfrey Moore managing director of TCG Adshy

visors a consultancyThis also means that companies will

rely more on services provided by othersThey will increasingly form process netshyworks a term for loosely connectedgroupings of specialised rms coined byJohn Hagel a business strategist at Deloitteamp Touche an auditing rm His prime exshyample is Li amp Fung a company based inHong Kong that has assembled a globalprocess network of nearly 10000 businesspartners in the clothing industry fromwhich it puts together customised supplychains for clothes designers

Both trends could mean that in futurehuge cloudswhich might be called inshydustry operating systemswill providebasic services for a particular sector for inshystance nance or logistics On top of thesesystems will sit many specialised and inshyterconnected rms just like applicationson a computing platform Yet this is onlyhalf the story The cloud changes not onlythe plumbing and structure of rms andindustries known as the transactionallayer but also their interactional layera term coined by Andy Mulholland chieftechnologist of Capgemini a consultancyHe denes this as the environment whereall the interactions between people takeplace both within an organisation andwith its business partners

Despite all the technology that has enshy

The Economist October 25th 2008 A special report on corporate IT 13

2

1

READERS may be excused if they havenever heard of Kinakuta It is a tiny isshy

land dreamed up by Neal Stephenson inhis novel Cryptonomicon In the scishyenceshyction classic libertarian technoloshygists and entrepreneurs try to turn it into adata haven for such things as anonymousonline banking and electronic money

Reality has indeed caught up with fanshytasy Iceland is about to become a Kinakuta

of sorts Data Islandia a local company istrying to establish the island as a vault for agrowing pile of data that rms must retainin order to comply with all kinds of regulashytions It has a compelling pitch With itscool climate abundant geothermal energyand secure remoteness Iceland appears tobe a prime location for data archives

As often however truth is strangerthan ction In a way Data Islandia is erectshy

ing borders in the cloud it intends to storeEuropean data according to European regshyulation and American bits according toAmerican rules What is more to keep thedata safe during transport they are pickedup with a data scooter (in essence a conshytainer lled with disk drives) and taken toIceland by aeroplaneas though breshyopshytic links had never been invented

This illustrates the political tensions

Computers without borders

The cloud may be the ultimate form of globalisation

tered the workplace in recent years so farthis layer has not really changed PCs cershytainly made people more productive butmost of their programs were not designedfor collaboration The enterprise applicashytions they worked with were still centralshyised systems And eshymail has in some waysmade things worse as the ood of messhysages takes up lots of time and attention

The dominant model is still that peoplerst labour individually and then mergetheir respective eorts says Mr Mulholshyland Itrsquos not much dierent from the ageof paper he writes in his book Mesh Colshylaboration Collaboration often meanspulling up your chair next to your colshyleague so you can look at the same screen

Consumers have pulled ahead of comshypanies in using cloudshybased services thatallow for better collaboration such asblogs wikis and social networks The rstgeneration of people that has grown up usshying all these tools is now entering theworkforce Being used to a culture of sharshying information freely these digital nashytives will be impatient with the rules oftraditional corporate IT

So it is helpful that rms have at last beshygun to embrace Web 20 technologies inearnest a trend predictably called Entershyprise 20 By 2013 companies around theglobe will spend $46 billion on such toolsaccording to Forrester Research What noshybody knows is how rms will trade o theadvantages of letting employees collaboshyrate with the outside world against the asshysociated risks for instance that condenshytial information is leaked Because of suchsecurity concerns (see chart 8) many rmsblock access to such sites as Facebook oncompany computers

Companies may not have much choicebut to open up says Mr Mulholland Emshy

ployees will increasingly resist constraintson their use of technology and they willhave a growing need to reach beyond thecorporate rewall Twenty years ago he arshygues 80 of the knowledge that workersrequired to do their jobs resided withintheir company Now it is only 20 becausethe world is changing ever faster We needto be open to new and unknown connecshytions with people and content he says

Exploiting the mesh in the words ofMr Mulholland will also mean that emshyployees may build simple applications oftheir own that allow them quickly to autoshymate repeat tasks using internal and extershynal IT services A new product by SerenaSoftware called Mashup Composer gives aforetaste of things to come Using a visualinterface even the not so technically mindshyed can quickly put together a service todeal say with travel requests or approvedocuments

Yet the impact of the cloud will also befelt on a macroeconomic level Just as itmakes small rms more competitive itwill help developing economies to move

ahead The biggest promise is that it willmake computing cheaper and easier touseand thus allow it to penetrate newmarkets says Russ Daniels chief technolshyogy ocer for HPrsquos cloudshyservices strategy

Hop skip and jumpThe mobile phone has already enabled deshyveloping countries to skip xedshyline netshyworks Cloud computing could prove to bea similar leapfrog technology because itdispenses with the need to build a cumbershysome IT infrastructure Software developshyers from a developing country can buildjust as great an application on our platformas somebody who lives in Palo Alto saysMr Benio of Salesforce

Indeed countries such as India will cershytainly take a big chunk of the global marketfor cloud services Zoho a popular suite ofwebshybased applications is operated by anIndian company AdventNet Indian hospishytals are already oering specialised healthshycare services this way The insurance armof ICICI an Indian bank has used thetechnology to come up with innovativeservices such as a personalised insurancefor diabetes Premiums are adjusted deshypending on how well policyholders stickto a tness plan All this suggests that theeconomic impact of the cloud may be feltnot only in the IT industry itself but in othshyer sectors too The internet disrupted themusic business Google disrupted the meshydia cloudshybased companies could becomedisrupters in other inecient industriesBuzzwords such as Health Care 20Banking 20 or even Education 20could soon acquire real meaning

But given that the cloud is global by nashyture how might it be regulated The conshyclusion of this special report will oersome answers 7

8Dangers within

Source Forrester

Research

How IT organisations feel about risk ofemployee-driven unsanctioned use of Web 20June 2008

Survey of 242 US IT decision-makers

at companies with 500+ employees

0 10 20 30 40 50

Very concerned

Somewhat concerned

Somewhat unconcerned

Completely unconcerned

14 A special report on corporate IT The Economist October 25th 2008

2

Previous special reports and a list offorthcoming ones can be found online

wwweconomistcomspecialreports

Future special reportsCountries and regionsSpain November 8thRussia November 29thIndia December 13th

Business nance economics and ideasCars in the developing world November 15th The sea January 3rd 2009The future of nance Jan 31st 2009

wwweconomistcomrights

Oer to readersReprints of this special report are available at aprice of pound350 plus postage and packing A minimum order of ve copies is required

Corporate oerCustomisation options on corporate orders of 100or more are available Please contact us to discussyour requirements

Send all orders to

The Rights and Syndication Department26 Red Lion SquareLondon WC1R 4HQ

Tel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492eshymail rightseconomistcom

For more information and to order special reportsand reprints online please visit our website

that will arise with the cloud In one way itis the ultimate form of globalisation vastvirtualised computer systems and elecshytronic services know no borders Yet govshyernments are likely to go to great lengths toavoid losing even more control

When the internet went mainstream inthe late 1990s libertarian thinkers arguedthat cyberspace was a distinct place callingfor laws and legal institutions of its ownAfter all they said it was built in such away that it interprets censorship as damshyage and routes around it But many govshyernments quickly found ways to blockcontent they deemed oensive Just look atChina and its great rewall

Controlling where data are stored andhow they are treated is harder though beshycause information can oat freely in thecloud And it is not just undemocratic govshyernments that want to control their citishyzensrsquo and companiesrsquo data indeed thereare nearly as many sets of data regulationas there are countries If we wanted to beon the safe side in terms of regulation weprobably would need 95 individual datacentres says Chuck Hollis a technologistat EMC the leading maker of storage gearwhich owns Mozy a cloud service that alshylows users to back up their data

There are technological xes to this proshyblem too Customers of Amazonrsquos storageservice for instance can have their datakept either in an American or a Europeandata centre In future cloud providers willoer many more options for where dataare kept and how they are protected Itseems possible that data as well as content

will eventually travel with security locashytion and expiry policies attached

It is when computers become virtualmachines that things get really trickyThese days IT systems are at the core ofmany companiesand just like data thesesystems can now live in a variety of placesWhat happens if they start to migrate toanother country where power is cheaperor regulation laxer Similarly if servicesare a combination of elements provided indierent jurisdictions who is liable ifsomething goes wrong

The cloudrsquos potential political and soshycial eect is only now entering the publicdebate IT rms are putting it on the agendaon both sides of the Atlantic In midshySepshytember for instance Google organised adiscussion on the subject in WashingtonDC A few days later SAP presented a whitepaper in Brussels pointing out that policyshymakers are not aware of the dramatic ecoshynomic impact of the Future Internet asthe paper calls the cloud

IT industry leaders note that ocialsfrom many countries have begun to takean interest in the cloud Some just wantdata centres to be built in their country tocreate jobs others are concerned about isshysues of law enforcement and jurisdictionThe danger they say is that cloud providshyers might be obliged to build more datacentres than are needed and have to comshyply with many dierent regulatory reshygimes Some of them have been oatingthe idea of freeshytrade zones for data censhytres where common rules would apply

Yet such ideas appear at odds with anshyother big question that could keep thecloud from growing how to protect prishyvacy Consumers expect their informashy

tion will be treated the same way on thecloud as if it were stored at home on theirown computers says Ari Schwartz of theCenter for Democracy and Technology anadvocacy group Many of the devices thatfeed into it such as sensors and cameraswill be intrusive For example Googlersquosvans go round taking streetshybyshystreet picshytures of cities for the companyrsquos onlinemap service called Streetview The picshytures are meant to help people nd theirway around but also often show passshyersshyby in embarrassing situations To proshytect their identity Google now blurs theirfaces and licence plates

Hands o my dataBut it is not only personal information thatcould get out into the open Privacy is aworry for companies tooand not just beshycause criminals or spies might intercepttheir data Once they are in the cloud govshyernments can also get their hands on themmore easily SWIFT the organisation thatmanages international bank transfers isplanning to build a data centre in neutralSwitzerland That will allow it to keep dataabout European transfers on the old contishynent where it cannot be subpoenaed bythe American government Webshybased eshymail is not safe either Thanks to the StoredCommunications Act American law enshyforcers can read peoplersquos messagesanddo not even have to tell the recipient

Just as too much regulation may keepthe cloud from rising high so could lack ofprivacy If consumers and companies canshynot be sure that their information is safethey will err on the side of caution But deshyspite all the caveats the precipitation fromthe cloud will be huge 7

The Economist October 25th 2008 A special report on corporate IT 7

1

IT WILL take something with a lot morebang to replace a medium that is thoushy

sands of years old That was the prevailingreaction when Amazon last November anshynounced the launch of Kindle an electronshyic book reader the size of a paperback thatcan store more than 200 volumes Yet bythe end of this year Amazon will have soldnearly 380000 Kindles says Mark Mahashyney an analyst with Citigroup a bankTurns out the Kindle is becoming the iPodof the book world he recently wrote in anote to clients in a reference to Applersquosiconic music player

It is certainly not the Kindlersquos looks thatexplain its success Compared with theiPod its design looks very last centurySoftware and battery life too leave a lot tobe desired The chief attraction of the deshyvice is the ease with which it can be used tobuy books and other content Equippedwith a mobileshyphone modem the Kindlecan simply pull new reading material outof the air Users do not even have to have awireless service contract Our vision is tohave every book that has ever been inprint available in less than 60 seconds exshyplains Je Bezos Amazonrsquos boss

It remains to be seen whether the Kinshydle will become a cultural phenomenonlike the iPod of which around 160m havebeen sold so far Amazon for its part isdownplaying the Kindlersquos success and willnot conrm any sales estimates But it issafe to say that once the next generation ofwireless networks is up and running hunshydreds of millions of devices will come likethe Kindle with builtshyin radio connectivity(see chart 5) Digital cameras will automatishycally upload pictures Smart meters willsend readings of how much electricity ahouse consumes All kinds of sensors willbe able to send messages even things likedipsticks when tanks of liquid are low

The relationship of these devices tocloud computing may not be obvious Butif huge data centres and applications makeup the cloud itself then all the hardwareand software through which it connectsand communicates with the real world areits periphery In IT speak this is known asthe front end or client side

As the Kindle and other examplesshow this layer does not have much to do

with the user interface or client device ofold It will do a lot of computing itself Itwill come in all shapes and sizes dependshying on what the user wants to do And itwill not just distribute information as theweb does but collect it as well The analoshygy that springs to mind here is a theatreperformance with audience participationthe electronic cloud will adapt to whateverit engulfs

As you like itJust like computing itself the dominantuser interface has evolved continually Inthe days of the mainframe when computshyers and their peripherals lled entirerooms people communicated with thesemachines rst via punch cards and thenvia greenshyglowing monitors which weresimply dumb terminals Only with the riseof personal computers did the user intershyface become more intelligent responsiveand graphical

The rst version of the web was thus abrief step backward To be sure browsersbrought colour and graphics to the hithershyto textshybased internet but they were asdumb as the mainframe terminal This haschanged only in recent years A bundle ofwebshydevelopment techniques dubbedAJAX and multimedia software such asAdobersquos Flash and Microsoftrsquos Silverlightnow allow programmers to write what arecalled rich internet applications (RIA)

Whatever the buzzword the principleis much the same Servers no longer dishup simple hypertext markup language(HTML) the webrsquos early lingua franca Inshycreasingly web pages are bona de piecesof software that are executed in the browsshyer Users of Web 20 sites who venture intomenu items such as view source in theirbrowsers can sometimes see thousands oflines of code

In recent months the browser has beshycome even more of a platform for otherprograms akin to an operating systemsuch as Windows The main driver of thistrend is Google with its huge strength indistribution that can only gain from moreand more software being oered as a sershyvice In May 2007 the Silicon Valley rmlaunched Gears a program that allowsweb applications to be used oine and inSeptember this year it released a newbrowser called Chrome Its most imporshytant feature is that it can execute several soshyphisticated web applications at once

Although for now the internet browserwill remain the main vehicle for people tointeract with the cloud other forms arecoming to the fore One is the widget asnippet of code that often lives on a PCrsquosdesktop and allows the user to get a quickpersonalised view of a set of data The ideais that a salesperson for instance shouldnot have to re up an entire application forcustomershyrelationship management tond out which leads to follow up

More importantly there is now a greatshyer variety of hardware through which toaccess the cloud Already desktop and lapshytop computers are starting to lose their moshynopoly for surng the web as smaller deshyvices such as smart mobile phones andvarious forms of portable computers startto compete with them

Asus a Taiwanese computershymakerstarted the trend when it launched a smallcheap laptop called Eee a year ago Nowthere are dozens of these devices Gartnerreckons that 52m of these minishynoteshybooks will be sold this year 8m next andas many as 50m in 2012

Perhaps the best indicator of things tocome is Intel a huge chipmaker It made afortune selling processors for servers pershysonal computers and laptops In June the

On the periphery

The cloudrsquos communications with its clients will become ever more intelligent and interactive

5Chatterboxes

Source iSuppli

Worldwide shipments of electronic productswith built-in wireless capability bn

2003 04 05 06 07 08 09 10 11 120

05

10

15

20

25

30

Local-area

Products with embedded wireless networking

Wide-areaTotal cellularhandsets

F O R E C A S T

8 A special report on corporate IT The Economist October 25th 2008

2 rm launched a new line of chips calledAtom designed to power what it calls netshybooks and mobile internet devices(MIDs) mainly intended for surng theweb Intel is also the driving force behindWiMAX a technology for wireless broadshyband access to the internet It wants to puta WiMAX radio chip into as many devicesas possible from portable computers tospecialised gadgets such as the Kindle

Applersquos iPhone and its App Storewhich allows iPhone and iPod owners todownload applications also provide aforetaste of how important wireless deshyvices will be for the cloud Apple launchedApp Store only in July Two months later ithad already tallied 100m downloadsmeaning that it took o much faster thanApplersquos highly successful iTunes musicstore Many of the programs on oer conshynect to the cloud including news feedsmultishyplayer games and a service thatkeeps track of the latest polls for Americarsquospresidential election

You can take it with youThe plethora of devices wirelessly conshynected to the internet will speed up a shiftthat is already under way from a deviceshycentric to an informationshycentric worldin the words of VMwarersquos Paul Maritz Upin the cloud there will be a body of data foreach individual that will accompany themthrough life he explains and it will not betied to any particular device as it is today

Again what will make this possible is

virtualisationthis time of client devicesnot servers With the help of software fromVMware and others some rms have alshyready virtualised their employeesrsquo desktopcomputers which allows them to be manshyaged centrally Operating systems and apshyplications will no longer run only on theemployeersquos PC but on a virtual machine ina data centre that can be accessed remotelytheoretically from any PC in the worldSooner or later mobile devices will also beshycome virtualised Users will be able to usetheir applications and data on whichevergadget they have at hand

Yet the cloudrsquos interface is designed notmerely to provide information but to gathshyer it as well The future belongs to servicesthat respond in real time to informationprovided either by their users or by nonshyhuman sensors predicts Tim OrsquoReilly thefounder of OrsquoReilly Media a publisher oftechnology books who coined the termWeb 20 Such live applications hesays will get better the more data they areable to collectand there will be plenty asthe cloud expands

One of the rst examples of such a sershyvice was Google What originally put thesearch service ahead of the competitionwhen it was launched a decade ago was itsway of harvesting the information providshyed by web users in linking to other sitesthe more links point to a page the moreuseful it must be These days most links aregenerated by computers so the originalform of this page rank algorithm has

long since been scrapped But Googlersquos apshyproach is still the same mining informashytion provided by web users such as theirsearch histories to provide more relevantsearch results and more eective and tarshygeted advertising

The direct link to users also allows rmssuch as Google continuously to improvetheir interface something traditional softshywareshymakers were not able to do At anygiven time Google is running dozens oftests to optimise the look and feel of its ofshyferings This makes web applications farless technologyshydriven and much moreusershyoriented says IBMrsquos Mr WladawskyshyBerger They are much more inspired bywhat goes on in the real world

A raft of startshyups is also trying to builda business by observing its users in eectturning them into human sensors One isWesabe (in which Mr OrsquoReilly has investshyed) At rst sight it looks much like any pershysonalshynance site that allows users to seetheir bank account and creditshycard inforshymation in one place But behind the scenesthe service is also sifting through its memshybersrsquo anonymised data to nd patterns andto oer recommendations for future transshyactions based for instance on how much aparticular customer regularly spends in asupermarket Wireless devices too will inshycreasingly become sensors that feed intothe cloud and adapt to new information

Nokia for its part is planning to buildall kinds of sensors into mobile phones tomonitor things like movement barometricpressure or even the ownerrsquos healthwhich many experts expect to become abig new trend Sensors could also be usedto record peoplersquos activities creating whatsome already term a lifelograising allkinds of privacy concerns

As wireless technology gets better andcheaper more and more dierent kinds ofobjects will connect directly to the cloudSAP the German softwareshymaker haslaunched a research project called The Inshyternet of Things to see what can be donewith the resulting information As part ofthat project an initiative called the FutureFactory is now under way to investigatehow intelligent tags can make manufacturshying more adaptive and ecient

More and more data get you only so farhowever In the end Googlersquos search reshysults and its textshybased online advertiseshyments are relevant to users only becausethe rm has devised clever ways to siftthrough them says Hal Varian the rmrsquoschief economist The big challenge of thecloud will be to connect the myriad data init and make them protable 7

The Economist October 25th 2008 A special report on corporate IT 9

1

EVEN elephants can die In 1993 extincshytion came close for IBM then the

worldrsquos largest computershymaker (it hassince been overtaken by HP) Its mainshyframe business was collapsing and protswere plummeting At that point LouisGerstner took over as chief executive andmanaged to turn the company aroundOnly a handful of people understandhow precariously close IBM came to runshyning out of cash in 1993 he writes in hismemoir Who Says Elephants CanrsquotDance Whether we would have had tole for bankruptcy I canrsquot say

There are many reasons why IBM nearshyly went bellyshyup not least the fact that BigBlue had become a bureaucratic monsterBut most critically it had failed to adapt tothe industryrsquos rst big platform shiftwhich only really made itself felt in the earshyly 1990s the move from mainframes tosmaller machines rst soshycalled minicomshyputers then personal computers IBMwas slow very slow in delivering distrishybuted computing and many small compashynies moved in to ll the gap Mr Gerstnerwrites

It is unlikely that the move into thecloud will produce a similar nearshydeath exshyperience or even a real casualtyif only beshycause IBM still stands as a warning Butthat does not mean that the structure of theIT industry will remain unchanged northat the economics will stay the sameOnce the IT sky really clouds over individshy

ual rmsrsquo share of the global IT budget (seechart 6) will shift

The move to distributed computingwhich started in the midshy1980s led to a bigchange in the IT industry In the era of themainframe computing came in a verticallyintegrated package mainly from IBM Withdistributed computing the industry beshycame a stack of horizontal layers In corshyporate IT these were mainly hardware thenetwork infrastructure software (such asoperating systems and databases) entershyprise applications and IT services

Not all of these layers were createdequal Computershymakers commanded athicker one for instance but software comshypanies were more protable The key proshygram was the operating system both onservers and on personal computers (clishyents) It was the standard to which othercomponents of IT systems had to conformUsually this was a version of Windowswhich made Microsoft the IBM of this newera of computing

Cloud computing is unlikely to bringabout quite such a dramatic shift In esshysence what it does is take the idea of distrishybuted computing a step farther Still it willadd a couple of layers to the IT stack One ismade up of the cloud providers such asAmazon and Google The other is softwarethat helps rms to turn their IT infrastrucshyture into their own cloud known as a virshytual operating system for data centres

Drawing a neat diagram of the IT stack

will also become increasingly dicult beshycause the layers are becoming less distinctIn a world of services it often does notmake sense to think of hardware and softshyware separately argues Padmasree Warshyrior the chief technology ocer of CiscoBoth need to be blended to oer new sershyvices she says

Mix and matchEven though the IT stack may not changeall that much the perceived value of thedierent layers will shift and with it theamount of prot IT rms can make fromeach of them Who will lose and who willwin depends on how much of computing

Highs and lows

As IT gets cloudier the economics of the business will change

6Follow the money

Source Gartner Forecast

Worldwide end-user spending $trn

2006 07 08 090

1

2

3

4

Computer hardware

Software

IT services

Telecomsequipment

Telecoms services

10 A special report on corporate IT The Economist October 25th 2008

2

1

eventually moves into the cloud In the rst round almost everybody in

the IT industry will do well as the cloudsare being built The biggest winners arelikely to be hardwareshymakers says MarkStahlman of Gartner Hardware alwayswins when new demand for computing isuncovered And we havenrsquot had such asweeping global demand since the 1990s

But in the longer term there will be relashytive winners and losers The hardwarebusiness could actually nd itself in thelosing group Its margins could getsqueezed as cloud computing matures beshycause there will be fewer customers withmore buying power says James Staten ofForrester Research Large cloud providerscan dictate how to build servers and atwhat price he notes

All that may explain why hardwareshymakers were among the rst to jump onthe cloudshycomputing bandwagon So farthey have done only what Mr Staten callscloudshywashing relabelling existing proshyducts that help customers build a moreexible IT infrastructure But they are alsopreparing for a time when more moneycan be made building clouds than buildingcomputers IBM and HP for instance haveteamed up with other rms and universishyties to design new cloud architectures

Which side of the fenceIn the long run says Mr Staten hardwareshymakers may be torn between supplyingcloud providers or becoming providersthemselves Being both will not be easybecause the rms would be competingwith their biggest customers Dell seems tohave decided to be a cloud supplier SunMicrosystems is a candidate to become aprovider it is oering a cloudshylike servicecalled Networkcom albeit not very sucshycessfully HP and IBM already used to thebalancing act of selling hardware and proshyviding IT services will try to do both

Makers of traditional software will ndthe going even tougher With the advent ofopenshysource software in particular Linuxselling operating systems had already beshycome less protable In a virtual worldthey will become even more commodishytised which is bad news for MicrosoftMany business applications no longerneed a big generalshypurpose server operatshying system but can use a specialised onewhich should put pressure on prices Onclient computers more and more applicashytions are written to run in browsers not onany particular operating system

Makers of business applications arealso on the defensive Traditionally they

have made billions by selling their proshygrams often demanding hefty sums to inshystall them and then charging an annualmaintenance fee for upgrades and technishycal support But this highly lucrative busishyness model has come under increasingpressure says Michael Cusumano a proshyfessor at the Massachusetts Institute ofTechnology (MIT)

For one he says software vendors willhave to nd new ways to charge for theirwares in the cloud tying licensing fees tothe number of users for instance will bedicult since services will mostly be conshysumed by other machines More imporshytantly the corporate world has becomeless and less willing to buy software forlarge sums of money so software rms listshyed on Americarsquos stockmarkets now makemost of their prots from maintenanceand other services (see chart 7) SAP will inshycrease its annual maintenance fees to atleast 22 of a programrsquos value over thenext few years in line with those of Oracleits main rival

Yet the biggest challenge for softwarerms is to become providers of online sershyvices themselves says Brent Thill of Citi Inshyvestment Research So far they havemoved slowly oering SaaS only on theside if at all This was partly because theircustomers were not that keen But moreimportantly notes Mr Thill the softwarehouses are still wedded to their old busishyness model With SaaS they do not get a bigupfront payment only subscription fees

Once Salesforce and NetSuite hadshown that the SaaS model works the inshycumbents began to move faster In Septemshyber last year for instance SAP presentedBusiness ByDesign a package of webshybased enterprise applications for smallerbusinesses But success will not come easishyly SAP has slowed down the introductionof the new service because it still needs towork out how to run it cheaply enough tomake a reasonable prot

Pure SaaS providers also have a lot ontheir minds Some experts such as JoshuaGreenbaum of Enterprise ApplicationsConsulting reckon that few will ever be asprotable as traditional software rms Alshythough it is almost a decade old Salesforcestarted making money only in 2006 mainshyly because it rst had to spend heavily onmarketing to attract customers But nowthat the service has 1m users and revenuesof more than $1 billion these costs willcome down says the rm

The companies that have the bestchance of making money from the cloudare those that get things to connect and

work together and help customers movetheir computing around This is music tothe ears of big IT rms not least IBM Nearshyly 80 of its revenues come from infrashystructure software and IT services which itcan oer globally HP is catching up havingtaken over EDS another big ITshyservicesrm Both Microsoft and SAP for their partbelieve that rms will want to have achoice in where to do their computing aswell as the exibility to move thingsaround over time

Two potentially important contestantsare rarely mentioned Cisco and EMC theleading makers of networking and storagegear respectively Having invested a lot insoftware and services Cisco has becomemore than just the source of most of theworldrsquos routers the trac cops of the intershynet It is betting that in the cloud the netshywork layer will become more importantfor instance to ensure that computingworkloads are able to move around seshycurely EMC for its part has made two dozshyen cloudshyrelated investments andlaunched a cloudshyinfrastructure division

Whoever manages to own the domishynant operating system for the data centrecould become a big winner VMware isbound to have a shot at this As well as beshying the market leader in virtualisation ithas the support of EMC which holds 86of the rm But the competition is likely tobe intense

Will this prospective platform war proshyduce a dominant company in the mould ofIBM or Microsoft that is able to extractmore than its fair share of the prots Probshyably not because it will be relatively easyto switch between vendors says GeorgeGilbert of Tech Strategy Partners a consulshytancy Nor is it likely that one rm willmanage to build a global cloud monopolyAlthough there are important economiesof scale in building a network of data censhy

7Serving up a treat

Source Michael Cusumano

Massachusetts Institute of Technology

US-listed software-firmsrsquo sales of total

1990 92 94 96 98 02 042000 06

03

04

05

06

07

Services

Products

The Economist October 25th 2008 A special report on corporate IT 11

2

1

BUSINESSES as well as most organishysations outside the business world

begin to shift from hierarchical processesto networked ones Nearly every facet ofhuman activity is transformed in someway by the emergent fabric of interconnecshytion This reorganisation leads to dramaticimprovements in eciency and producshytivity So said Wired magazine the centralorgan of Web 10 in July 1997 in an essay enshytitled The Long Boom arguing that theworld was in for 25 years of prosperityfreedom and a better environment Backthen the article reected the general optishy

mism that led up to the internet bubbleNow after two busts several wars andgrowing fears of global warming it makesfor somewhat surreal reading

The cloud lends itself to similar hypershybole Yet so far there has not been much deshybate about its economic falloutprobablybecause the new economy ended badlyand the newest one is currently doing evenworse There will be many ways in whichthe cloud will change businesses and theeconomy most of them hard to predict butone theme is already emerging Businessesare becoming more like the technology itshy

self more adaptable more interwovenand more specialised These developshyments may not be new but cloud computshying will speed them up

Corporate IT has always promised tomake companies more agile In the 1990smany companies reshyengineered their busishyness processes when they started using aform of software called enterpriseshyreshysource planning (ERP) which does thingssuch as managing a rmrsquos nances andemployees But once these massive softshyware packages were in place it was exceedshyingly dicult to change them Implementshy

The long nimbus

The cloud will make businesses more adaptable interconnected and specialisedand often smaller

tres the computing needs of companiesand consumers vary too widely for onesize to t all

Even if the cloud is likely to transformthe IT industry some things will stay thesame One is the importance of lockshyin Ifanything companies and developers willbe even more dependent on cloud platshyforms and applications than they are onthe old kind SaaS promotes the hollowshying out of IT a rm that needs to migrateto another system will no longer have therequired expertise When Facebook saymakes a change to its platform developershave no choice but to go along with itSome are already calling for a CloudComputing Consortium in the mould ofthe World Wide Web Consortium (W3C)to set standards that allow applications tomigrate easily from one platform to anothshyer One standard initiative called OpenshySocial already allows the same webshybased application to run in several socialnetworks which are also clouds of sorts

But standards go only so far Some fearthat one company could try to monopoliseother key parts of the cloud ironically Mishycrosoft worries that Google is doing exactshyly that with the online advertising marketTo Steve Ballmer Microsoftrsquos boss Gooshyglersquos advertising platform is like a ywheelthat picks up speed as more websites atshytract more advertisers and vice versa

Eric Schmidt Googlersquos chief executivedenies any evil intent to achieve worlddomination He argues with some justicethat it would be hard for Google to controlthe cloud if only for technical reasonsmuch of it is already based on open stanshy

dards and its loose structure does not lenditself to locking customers in

Mr Schmidt promises that Google willnot lock its users in either Our competishytive advantage is not from lockshyin he saysbut from having specialised knowledgeof how to build data centres and how tobuild new software that is not reproducshyible such as our search algorithm This ishow we make our money

Yet Google is more like Microsoft than itlikes to admit says Nicholas Carr a techshynology writer and blogger Microsoft heargues achieved its dominant position inthe PC world not least by commoditising

products such as the browser that arecomplementary to its cash cows such asWindows as their cost came down deshymand for Microsoftrsquos products went up

Similarly Googlersquos natural instinct is todo its utmost to encourage people to spendmore time online because that will givethe company more opportunities to selladvertisements and collect data aboutthem According to Mr Carr almost everyshything the company doesbuilding hugedata centres ghting copyright restrictionsdigitising the worldrsquos libraries developinga new browser and most recently evenhelping to launch satellitesis aimed at inshycreasing the use of the internet Googlewants information to be free he recentlywrote in his blog because as the cost of inshyformation falls it makes more money

But Google may never become as powshyerful as Microsoft because regulators areunlikely to let it Microsoft was eventuallyput in the dock for abusing its monopolybecause it got too greedy pushing most ofthe rest of the industry to complain Giventhat the world has already lived throughthe Microsoft drama and that Google willaect many more industries the searchcompany is likely to be restrained muchearlier The rm is currently in negotiationswith the US Justice Department about acontroversial advertising partnership beshytween itself and one of its competitors Yashyhoo which would further strengthenGooglersquos position in online advertising

Even if the economics of the cloud arestill in ux though it is already clear that itwill have farshyreaching implications forbusinesses and for society as a whole 7

12 A special report on corporate IT The Economist October 25th 2008

2

1

ing SAP the market leader in ERP is likepouring concrete into your company goesan old joke among IT types

This helps to explain why in manyrms IT departments and business unitshave traditionally been at loggerheads Inrecent years tensions have worsenedCompanies must grapple with evershychangshying markets and regulations yet IT budgetsare being cut Many rms now have a hugebacklog of IT projects

Hence the interest in cloud computingIt turns capital expenditure into operationshyal expenditure which makes things mucheasier and cheaper Instead of having toshell out a lot of money for say a server totest an application and even with luckwait a few weeks for it to be up and runshyning managers just have to whip out acredit card open an account at AmazonWeb Services (AWS) and re up a virtualmachine for a few dollars

In many rms senior managers probashybly do not even know that business unitsare using AWS or similar services In someorganisations however it has already beshycome a muchshyappreciated RampD tool Pharshymaceutical companies for instance areregularly tapping into AWS to calculatesimulations Sogeti a European consultanshycy has used a cloud built by IBM to allow itto test new ideas and quickly put togetheran IT system for a companyshywide brainshystorming event

Cloud services have also been hugelysuccessful with startshyups which can nowenjoy infrastructure of the same quality aslarge companies In fact AWS is probablythe main reason why there are now somany rms oering all kinds of Web 20services Their usefulness may sometimesbe hard to gauge but that is a good thing Itis a sign of lively combinatorial innovashytion made possible because entrepreshyneurs can cheaply try new combinationsof technology says Googlersquos Mr Varian

Many startshyups would probably noteven exist without the cloud Take Anishymoto a service that lets users turn photosinto artsy music videos using articial inshytelligence When it launched on Facebooka social network demand was such that ithad to increase the number of its virtualmachines on AWS from 50 to 3500 withinthree days You could give me unlimitedfunding says Adam Selipsky of AWSand I wouldnrsquot know how to deploy thatmany servers in 72 hours

Combinatorial innovation should alsobe made easier by the fact that the cloudwill be a huge collection of electronic sershyvices based on standards But this serviceshy

oriented architecture will be even moreimportant for existing rms because itshould free their inner workingstheirbusiness processesfrom the straitjacketof their ERP systems and allow these proshycesses to be more easily adapted for inshystance to launch a new product

Again the software industry has beenpromising this for some years under thebanner of serviceshyoriented architecturediscussed in an earlier chapter Yet theadoption of SOA has been slow and manyprojects have failed says Chris Howard ofthe Burton Group a consultancy The reashysons are not just technical but cultural forexample some business units are not usedto sharing data Cloud computing will helpresolve some of these problems Manywebshybased services are built to be integratshyed into existing business processes

Donrsquot do it yourselfWhat eect will all this have on the natureof the rm If IT systems really allow comshypanies to become more modular and exshyible this should foster further specialisashytion It will become even easier tooutsource business processes or at leastthose parts of them where rms do not enshyjoy a competitive advantage Companieswill increasingly focus on their core andshed the context in the words of Geofshyfrey Moore managing director of TCG Adshy

visors a consultancyThis also means that companies will

rely more on services provided by othersThey will increasingly form process netshyworks a term for loosely connectedgroupings of specialised rms coined byJohn Hagel a business strategist at Deloitteamp Touche an auditing rm His prime exshyample is Li amp Fung a company based inHong Kong that has assembled a globalprocess network of nearly 10000 businesspartners in the clothing industry fromwhich it puts together customised supplychains for clothes designers

Both trends could mean that in futurehuge cloudswhich might be called inshydustry operating systemswill providebasic services for a particular sector for inshystance nance or logistics On top of thesesystems will sit many specialised and inshyterconnected rms just like applicationson a computing platform Yet this is onlyhalf the story The cloud changes not onlythe plumbing and structure of rms andindustries known as the transactionallayer but also their interactional layera term coined by Andy Mulholland chieftechnologist of Capgemini a consultancyHe denes this as the environment whereall the interactions between people takeplace both within an organisation andwith its business partners

Despite all the technology that has enshy

The Economist October 25th 2008 A special report on corporate IT 13

2

1

READERS may be excused if they havenever heard of Kinakuta It is a tiny isshy

land dreamed up by Neal Stephenson inhis novel Cryptonomicon In the scishyenceshyction classic libertarian technoloshygists and entrepreneurs try to turn it into adata haven for such things as anonymousonline banking and electronic money

Reality has indeed caught up with fanshytasy Iceland is about to become a Kinakuta

of sorts Data Islandia a local company istrying to establish the island as a vault for agrowing pile of data that rms must retainin order to comply with all kinds of regulashytions It has a compelling pitch With itscool climate abundant geothermal energyand secure remoteness Iceland appears tobe a prime location for data archives

As often however truth is strangerthan ction In a way Data Islandia is erectshy

ing borders in the cloud it intends to storeEuropean data according to European regshyulation and American bits according toAmerican rules What is more to keep thedata safe during transport they are pickedup with a data scooter (in essence a conshytainer lled with disk drives) and taken toIceland by aeroplaneas though breshyopshytic links had never been invented

This illustrates the political tensions

Computers without borders

The cloud may be the ultimate form of globalisation

tered the workplace in recent years so farthis layer has not really changed PCs cershytainly made people more productive butmost of their programs were not designedfor collaboration The enterprise applicashytions they worked with were still centralshyised systems And eshymail has in some waysmade things worse as the ood of messhysages takes up lots of time and attention

The dominant model is still that peoplerst labour individually and then mergetheir respective eorts says Mr Mulholshyland Itrsquos not much dierent from the ageof paper he writes in his book Mesh Colshylaboration Collaboration often meanspulling up your chair next to your colshyleague so you can look at the same screen

Consumers have pulled ahead of comshypanies in using cloudshybased services thatallow for better collaboration such asblogs wikis and social networks The rstgeneration of people that has grown up usshying all these tools is now entering theworkforce Being used to a culture of sharshying information freely these digital nashytives will be impatient with the rules oftraditional corporate IT

So it is helpful that rms have at last beshygun to embrace Web 20 technologies inearnest a trend predictably called Entershyprise 20 By 2013 companies around theglobe will spend $46 billion on such toolsaccording to Forrester Research What noshybody knows is how rms will trade o theadvantages of letting employees collaboshyrate with the outside world against the asshysociated risks for instance that condenshytial information is leaked Because of suchsecurity concerns (see chart 8) many rmsblock access to such sites as Facebook oncompany computers

Companies may not have much choicebut to open up says Mr Mulholland Emshy

ployees will increasingly resist constraintson their use of technology and they willhave a growing need to reach beyond thecorporate rewall Twenty years ago he arshygues 80 of the knowledge that workersrequired to do their jobs resided withintheir company Now it is only 20 becausethe world is changing ever faster We needto be open to new and unknown connecshytions with people and content he says

Exploiting the mesh in the words ofMr Mulholland will also mean that emshyployees may build simple applications oftheir own that allow them quickly to autoshymate repeat tasks using internal and extershynal IT services A new product by SerenaSoftware called Mashup Composer gives aforetaste of things to come Using a visualinterface even the not so technically mindshyed can quickly put together a service todeal say with travel requests or approvedocuments

Yet the impact of the cloud will also befelt on a macroeconomic level Just as itmakes small rms more competitive itwill help developing economies to move

ahead The biggest promise is that it willmake computing cheaper and easier touseand thus allow it to penetrate newmarkets says Russ Daniels chief technolshyogy ocer for HPrsquos cloudshyservices strategy

Hop skip and jumpThe mobile phone has already enabled deshyveloping countries to skip xedshyline netshyworks Cloud computing could prove to bea similar leapfrog technology because itdispenses with the need to build a cumbershysome IT infrastructure Software developshyers from a developing country can buildjust as great an application on our platformas somebody who lives in Palo Alto saysMr Benio of Salesforce

Indeed countries such as India will cershytainly take a big chunk of the global marketfor cloud services Zoho a popular suite ofwebshybased applications is operated by anIndian company AdventNet Indian hospishytals are already oering specialised healthshycare services this way The insurance armof ICICI an Indian bank has used thetechnology to come up with innovativeservices such as a personalised insurancefor diabetes Premiums are adjusted deshypending on how well policyholders stickto a tness plan All this suggests that theeconomic impact of the cloud may be feltnot only in the IT industry itself but in othshyer sectors too The internet disrupted themusic business Google disrupted the meshydia cloudshybased companies could becomedisrupters in other inecient industriesBuzzwords such as Health Care 20Banking 20 or even Education 20could soon acquire real meaning

But given that the cloud is global by nashyture how might it be regulated The conshyclusion of this special report will oersome answers 7

8Dangers within

Source Forrester

Research

How IT organisations feel about risk ofemployee-driven unsanctioned use of Web 20June 2008

Survey of 242 US IT decision-makers

at companies with 500+ employees

0 10 20 30 40 50

Very concerned

Somewhat concerned

Somewhat unconcerned

Completely unconcerned

14 A special report on corporate IT The Economist October 25th 2008

2

Previous special reports and a list offorthcoming ones can be found online

wwweconomistcomspecialreports

Future special reportsCountries and regionsSpain November 8thRussia November 29thIndia December 13th

Business nance economics and ideasCars in the developing world November 15th The sea January 3rd 2009The future of nance Jan 31st 2009

wwweconomistcomrights

Oer to readersReprints of this special report are available at aprice of pound350 plus postage and packing A minimum order of ve copies is required

Corporate oerCustomisation options on corporate orders of 100or more are available Please contact us to discussyour requirements

Send all orders to

The Rights and Syndication Department26 Red Lion SquareLondon WC1R 4HQ

Tel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492eshymail rightseconomistcom

For more information and to order special reportsand reprints online please visit our website

that will arise with the cloud In one way itis the ultimate form of globalisation vastvirtualised computer systems and elecshytronic services know no borders Yet govshyernments are likely to go to great lengths toavoid losing even more control

When the internet went mainstream inthe late 1990s libertarian thinkers arguedthat cyberspace was a distinct place callingfor laws and legal institutions of its ownAfter all they said it was built in such away that it interprets censorship as damshyage and routes around it But many govshyernments quickly found ways to blockcontent they deemed oensive Just look atChina and its great rewall

Controlling where data are stored andhow they are treated is harder though beshycause information can oat freely in thecloud And it is not just undemocratic govshyernments that want to control their citishyzensrsquo and companiesrsquo data indeed thereare nearly as many sets of data regulationas there are countries If we wanted to beon the safe side in terms of regulation weprobably would need 95 individual datacentres says Chuck Hollis a technologistat EMC the leading maker of storage gearwhich owns Mozy a cloud service that alshylows users to back up their data

There are technological xes to this proshyblem too Customers of Amazonrsquos storageservice for instance can have their datakept either in an American or a Europeandata centre In future cloud providers willoer many more options for where dataare kept and how they are protected Itseems possible that data as well as content

will eventually travel with security locashytion and expiry policies attached

It is when computers become virtualmachines that things get really trickyThese days IT systems are at the core ofmany companiesand just like data thesesystems can now live in a variety of placesWhat happens if they start to migrate toanother country where power is cheaperor regulation laxer Similarly if servicesare a combination of elements provided indierent jurisdictions who is liable ifsomething goes wrong

The cloudrsquos potential political and soshycial eect is only now entering the publicdebate IT rms are putting it on the agendaon both sides of the Atlantic In midshySepshytember for instance Google organised adiscussion on the subject in WashingtonDC A few days later SAP presented a whitepaper in Brussels pointing out that policyshymakers are not aware of the dramatic ecoshynomic impact of the Future Internet asthe paper calls the cloud

IT industry leaders note that ocialsfrom many countries have begun to takean interest in the cloud Some just wantdata centres to be built in their country tocreate jobs others are concerned about isshysues of law enforcement and jurisdictionThe danger they say is that cloud providshyers might be obliged to build more datacentres than are needed and have to comshyply with many dierent regulatory reshygimes Some of them have been oatingthe idea of freeshytrade zones for data censhytres where common rules would apply

Yet such ideas appear at odds with anshyother big question that could keep thecloud from growing how to protect prishyvacy Consumers expect their informashy

tion will be treated the same way on thecloud as if it were stored at home on theirown computers says Ari Schwartz of theCenter for Democracy and Technology anadvocacy group Many of the devices thatfeed into it such as sensors and cameraswill be intrusive For example Googlersquosvans go round taking streetshybyshystreet picshytures of cities for the companyrsquos onlinemap service called Streetview The picshytures are meant to help people nd theirway around but also often show passshyersshyby in embarrassing situations To proshytect their identity Google now blurs theirfaces and licence plates

Hands o my dataBut it is not only personal information thatcould get out into the open Privacy is aworry for companies tooand not just beshycause criminals or spies might intercepttheir data Once they are in the cloud govshyernments can also get their hands on themmore easily SWIFT the organisation thatmanages international bank transfers isplanning to build a data centre in neutralSwitzerland That will allow it to keep dataabout European transfers on the old contishynent where it cannot be subpoenaed bythe American government Webshybased eshymail is not safe either Thanks to the StoredCommunications Act American law enshyforcers can read peoplersquos messagesanddo not even have to tell the recipient

Just as too much regulation may keepthe cloud from rising high so could lack ofprivacy If consumers and companies canshynot be sure that their information is safethey will err on the side of caution But deshyspite all the caveats the precipitation fromthe cloud will be huge 7

8 A special report on corporate IT The Economist October 25th 2008

2 rm launched a new line of chips calledAtom designed to power what it calls netshybooks and mobile internet devices(MIDs) mainly intended for surng theweb Intel is also the driving force behindWiMAX a technology for wireless broadshyband access to the internet It wants to puta WiMAX radio chip into as many devicesas possible from portable computers tospecialised gadgets such as the Kindle

Applersquos iPhone and its App Storewhich allows iPhone and iPod owners todownload applications also provide aforetaste of how important wireless deshyvices will be for the cloud Apple launchedApp Store only in July Two months later ithad already tallied 100m downloadsmeaning that it took o much faster thanApplersquos highly successful iTunes musicstore Many of the programs on oer conshynect to the cloud including news feedsmultishyplayer games and a service thatkeeps track of the latest polls for Americarsquospresidential election

You can take it with youThe plethora of devices wirelessly conshynected to the internet will speed up a shiftthat is already under way from a deviceshycentric to an informationshycentric worldin the words of VMwarersquos Paul Maritz Upin the cloud there will be a body of data foreach individual that will accompany themthrough life he explains and it will not betied to any particular device as it is today

Again what will make this possible is

virtualisationthis time of client devicesnot servers With the help of software fromVMware and others some rms have alshyready virtualised their employeesrsquo desktopcomputers which allows them to be manshyaged centrally Operating systems and apshyplications will no longer run only on theemployeersquos PC but on a virtual machine ina data centre that can be accessed remotelytheoretically from any PC in the worldSooner or later mobile devices will also beshycome virtualised Users will be able to usetheir applications and data on whichevergadget they have at hand

Yet the cloudrsquos interface is designed notmerely to provide information but to gathshyer it as well The future belongs to servicesthat respond in real time to informationprovided either by their users or by nonshyhuman sensors predicts Tim OrsquoReilly thefounder of OrsquoReilly Media a publisher oftechnology books who coined the termWeb 20 Such live applications hesays will get better the more data they areable to collectand there will be plenty asthe cloud expands

One of the rst examples of such a sershyvice was Google What originally put thesearch service ahead of the competitionwhen it was launched a decade ago was itsway of harvesting the information providshyed by web users in linking to other sitesthe more links point to a page the moreuseful it must be These days most links aregenerated by computers so the originalform of this page rank algorithm has

long since been scrapped But Googlersquos apshyproach is still the same mining informashytion provided by web users such as theirsearch histories to provide more relevantsearch results and more eective and tarshygeted advertising

The direct link to users also allows rmssuch as Google continuously to improvetheir interface something traditional softshywareshymakers were not able to do At anygiven time Google is running dozens oftests to optimise the look and feel of its ofshyferings This makes web applications farless technologyshydriven and much moreusershyoriented says IBMrsquos Mr WladawskyshyBerger They are much more inspired bywhat goes on in the real world

A raft of startshyups is also trying to builda business by observing its users in eectturning them into human sensors One isWesabe (in which Mr OrsquoReilly has investshyed) At rst sight it looks much like any pershysonalshynance site that allows users to seetheir bank account and creditshycard inforshymation in one place But behind the scenesthe service is also sifting through its memshybersrsquo anonymised data to nd patterns andto oer recommendations for future transshyactions based for instance on how much aparticular customer regularly spends in asupermarket Wireless devices too will inshycreasingly become sensors that feed intothe cloud and adapt to new information

Nokia for its part is planning to buildall kinds of sensors into mobile phones tomonitor things like movement barometricpressure or even the ownerrsquos healthwhich many experts expect to become abig new trend Sensors could also be usedto record peoplersquos activities creating whatsome already term a lifelograising allkinds of privacy concerns

As wireless technology gets better andcheaper more and more dierent kinds ofobjects will connect directly to the cloudSAP the German softwareshymaker haslaunched a research project called The Inshyternet of Things to see what can be donewith the resulting information As part ofthat project an initiative called the FutureFactory is now under way to investigatehow intelligent tags can make manufacturshying more adaptive and ecient

More and more data get you only so farhowever In the end Googlersquos search reshysults and its textshybased online advertiseshyments are relevant to users only becausethe rm has devised clever ways to siftthrough them says Hal Varian the rmrsquoschief economist The big challenge of thecloud will be to connect the myriad data init and make them protable 7

The Economist October 25th 2008 A special report on corporate IT 9

1

EVEN elephants can die In 1993 extincshytion came close for IBM then the

worldrsquos largest computershymaker (it hassince been overtaken by HP) Its mainshyframe business was collapsing and protswere plummeting At that point LouisGerstner took over as chief executive andmanaged to turn the company aroundOnly a handful of people understandhow precariously close IBM came to runshyning out of cash in 1993 he writes in hismemoir Who Says Elephants CanrsquotDance Whether we would have had tole for bankruptcy I canrsquot say

There are many reasons why IBM nearshyly went bellyshyup not least the fact that BigBlue had become a bureaucratic monsterBut most critically it had failed to adapt tothe industryrsquos rst big platform shiftwhich only really made itself felt in the earshyly 1990s the move from mainframes tosmaller machines rst soshycalled minicomshyputers then personal computers IBMwas slow very slow in delivering distrishybuted computing and many small compashynies moved in to ll the gap Mr Gerstnerwrites

It is unlikely that the move into thecloud will produce a similar nearshydeath exshyperience or even a real casualtyif only beshycause IBM still stands as a warning Butthat does not mean that the structure of theIT industry will remain unchanged northat the economics will stay the sameOnce the IT sky really clouds over individshy

ual rmsrsquo share of the global IT budget (seechart 6) will shift

The move to distributed computingwhich started in the midshy1980s led to a bigchange in the IT industry In the era of themainframe computing came in a verticallyintegrated package mainly from IBM Withdistributed computing the industry beshycame a stack of horizontal layers In corshyporate IT these were mainly hardware thenetwork infrastructure software (such asoperating systems and databases) entershyprise applications and IT services

Not all of these layers were createdequal Computershymakers commanded athicker one for instance but software comshypanies were more protable The key proshygram was the operating system both onservers and on personal computers (clishyents) It was the standard to which othercomponents of IT systems had to conformUsually this was a version of Windowswhich made Microsoft the IBM of this newera of computing

Cloud computing is unlikely to bringabout quite such a dramatic shift In esshysence what it does is take the idea of distrishybuted computing a step farther Still it willadd a couple of layers to the IT stack One ismade up of the cloud providers such asAmazon and Google The other is softwarethat helps rms to turn their IT infrastrucshyture into their own cloud known as a virshytual operating system for data centres

Drawing a neat diagram of the IT stack

will also become increasingly dicult beshycause the layers are becoming less distinctIn a world of services it often does notmake sense to think of hardware and softshyware separately argues Padmasree Warshyrior the chief technology ocer of CiscoBoth need to be blended to oer new sershyvices she says

Mix and matchEven though the IT stack may not changeall that much the perceived value of thedierent layers will shift and with it theamount of prot IT rms can make fromeach of them Who will lose and who willwin depends on how much of computing

Highs and lows

As IT gets cloudier the economics of the business will change

6Follow the money

Source Gartner Forecast

Worldwide end-user spending $trn

2006 07 08 090

1

2

3

4

Computer hardware

Software

IT services

Telecomsequipment

Telecoms services

10 A special report on corporate IT The Economist October 25th 2008

2

1

eventually moves into the cloud In the rst round almost everybody in

the IT industry will do well as the cloudsare being built The biggest winners arelikely to be hardwareshymakers says MarkStahlman of Gartner Hardware alwayswins when new demand for computing isuncovered And we havenrsquot had such asweeping global demand since the 1990s

But in the longer term there will be relashytive winners and losers The hardwarebusiness could actually nd itself in thelosing group Its margins could getsqueezed as cloud computing matures beshycause there will be fewer customers withmore buying power says James Staten ofForrester Research Large cloud providerscan dictate how to build servers and atwhat price he notes

All that may explain why hardwareshymakers were among the rst to jump onthe cloudshycomputing bandwagon So farthey have done only what Mr Staten callscloudshywashing relabelling existing proshyducts that help customers build a moreexible IT infrastructure But they are alsopreparing for a time when more moneycan be made building clouds than buildingcomputers IBM and HP for instance haveteamed up with other rms and universishyties to design new cloud architectures

Which side of the fenceIn the long run says Mr Staten hardwareshymakers may be torn between supplyingcloud providers or becoming providersthemselves Being both will not be easybecause the rms would be competingwith their biggest customers Dell seems tohave decided to be a cloud supplier SunMicrosystems is a candidate to become aprovider it is oering a cloudshylike servicecalled Networkcom albeit not very sucshycessfully HP and IBM already used to thebalancing act of selling hardware and proshyviding IT services will try to do both

Makers of traditional software will ndthe going even tougher With the advent ofopenshysource software in particular Linuxselling operating systems had already beshycome less protable In a virtual worldthey will become even more commodishytised which is bad news for MicrosoftMany business applications no longerneed a big generalshypurpose server operatshying system but can use a specialised onewhich should put pressure on prices Onclient computers more and more applicashytions are written to run in browsers not onany particular operating system

Makers of business applications arealso on the defensive Traditionally they

have made billions by selling their proshygrams often demanding hefty sums to inshystall them and then charging an annualmaintenance fee for upgrades and technishycal support But this highly lucrative busishyness model has come under increasingpressure says Michael Cusumano a proshyfessor at the Massachusetts Institute ofTechnology (MIT)

For one he says software vendors willhave to nd new ways to charge for theirwares in the cloud tying licensing fees tothe number of users for instance will bedicult since services will mostly be conshysumed by other machines More imporshytantly the corporate world has becomeless and less willing to buy software forlarge sums of money so software rms listshyed on Americarsquos stockmarkets now makemost of their prots from maintenanceand other services (see chart 7) SAP will inshycrease its annual maintenance fees to atleast 22 of a programrsquos value over thenext few years in line with those of Oracleits main rival

Yet the biggest challenge for softwarerms is to become providers of online sershyvices themselves says Brent Thill of Citi Inshyvestment Research So far they havemoved slowly oering SaaS only on theside if at all This was partly because theircustomers were not that keen But moreimportantly notes Mr Thill the softwarehouses are still wedded to their old busishyness model With SaaS they do not get a bigupfront payment only subscription fees

Once Salesforce and NetSuite hadshown that the SaaS model works the inshycumbents began to move faster In Septemshyber last year for instance SAP presentedBusiness ByDesign a package of webshybased enterprise applications for smallerbusinesses But success will not come easishyly SAP has slowed down the introductionof the new service because it still needs towork out how to run it cheaply enough tomake a reasonable prot

Pure SaaS providers also have a lot ontheir minds Some experts such as JoshuaGreenbaum of Enterprise ApplicationsConsulting reckon that few will ever be asprotable as traditional software rms Alshythough it is almost a decade old Salesforcestarted making money only in 2006 mainshyly because it rst had to spend heavily onmarketing to attract customers But nowthat the service has 1m users and revenuesof more than $1 billion these costs willcome down says the rm

The companies that have the bestchance of making money from the cloudare those that get things to connect and

work together and help customers movetheir computing around This is music tothe ears of big IT rms not least IBM Nearshyly 80 of its revenues come from infrashystructure software and IT services which itcan oer globally HP is catching up havingtaken over EDS another big ITshyservicesrm Both Microsoft and SAP for their partbelieve that rms will want to have achoice in where to do their computing aswell as the exibility to move thingsaround over time

Two potentially important contestantsare rarely mentioned Cisco and EMC theleading makers of networking and storagegear respectively Having invested a lot insoftware and services Cisco has becomemore than just the source of most of theworldrsquos routers the trac cops of the intershynet It is betting that in the cloud the netshywork layer will become more importantfor instance to ensure that computingworkloads are able to move around seshycurely EMC for its part has made two dozshyen cloudshyrelated investments andlaunched a cloudshyinfrastructure division

Whoever manages to own the domishynant operating system for the data centrecould become a big winner VMware isbound to have a shot at this As well as beshying the market leader in virtualisation ithas the support of EMC which holds 86of the rm But the competition is likely tobe intense

Will this prospective platform war proshyduce a dominant company in the mould ofIBM or Microsoft that is able to extractmore than its fair share of the prots Probshyably not because it will be relatively easyto switch between vendors says GeorgeGilbert of Tech Strategy Partners a consulshytancy Nor is it likely that one rm willmanage to build a global cloud monopolyAlthough there are important economiesof scale in building a network of data censhy

7Serving up a treat

Source Michael Cusumano

Massachusetts Institute of Technology

US-listed software-firmsrsquo sales of total

1990 92 94 96 98 02 042000 06

03

04

05

06

07

Services

Products

The Economist October 25th 2008 A special report on corporate IT 11

2

1

BUSINESSES as well as most organishysations outside the business world

begin to shift from hierarchical processesto networked ones Nearly every facet ofhuman activity is transformed in someway by the emergent fabric of interconnecshytion This reorganisation leads to dramaticimprovements in eciency and producshytivity So said Wired magazine the centralorgan of Web 10 in July 1997 in an essay enshytitled The Long Boom arguing that theworld was in for 25 years of prosperityfreedom and a better environment Backthen the article reected the general optishy

mism that led up to the internet bubbleNow after two busts several wars andgrowing fears of global warming it makesfor somewhat surreal reading

The cloud lends itself to similar hypershybole Yet so far there has not been much deshybate about its economic falloutprobablybecause the new economy ended badlyand the newest one is currently doing evenworse There will be many ways in whichthe cloud will change businesses and theeconomy most of them hard to predict butone theme is already emerging Businessesare becoming more like the technology itshy

self more adaptable more interwovenand more specialised These developshyments may not be new but cloud computshying will speed them up

Corporate IT has always promised tomake companies more agile In the 1990smany companies reshyengineered their busishyness processes when they started using aform of software called enterpriseshyreshysource planning (ERP) which does thingssuch as managing a rmrsquos nances andemployees But once these massive softshyware packages were in place it was exceedshyingly dicult to change them Implementshy

The long nimbus

The cloud will make businesses more adaptable interconnected and specialisedand often smaller

tres the computing needs of companiesand consumers vary too widely for onesize to t all

Even if the cloud is likely to transformthe IT industry some things will stay thesame One is the importance of lockshyin Ifanything companies and developers willbe even more dependent on cloud platshyforms and applications than they are onthe old kind SaaS promotes the hollowshying out of IT a rm that needs to migrateto another system will no longer have therequired expertise When Facebook saymakes a change to its platform developershave no choice but to go along with itSome are already calling for a CloudComputing Consortium in the mould ofthe World Wide Web Consortium (W3C)to set standards that allow applications tomigrate easily from one platform to anothshyer One standard initiative called OpenshySocial already allows the same webshybased application to run in several socialnetworks which are also clouds of sorts

But standards go only so far Some fearthat one company could try to monopoliseother key parts of the cloud ironically Mishycrosoft worries that Google is doing exactshyly that with the online advertising marketTo Steve Ballmer Microsoftrsquos boss Gooshyglersquos advertising platform is like a ywheelthat picks up speed as more websites atshytract more advertisers and vice versa

Eric Schmidt Googlersquos chief executivedenies any evil intent to achieve worlddomination He argues with some justicethat it would be hard for Google to controlthe cloud if only for technical reasonsmuch of it is already based on open stanshy

dards and its loose structure does not lenditself to locking customers in

Mr Schmidt promises that Google willnot lock its users in either Our competishytive advantage is not from lockshyin he saysbut from having specialised knowledgeof how to build data centres and how tobuild new software that is not reproducshyible such as our search algorithm This ishow we make our money

Yet Google is more like Microsoft than itlikes to admit says Nicholas Carr a techshynology writer and blogger Microsoft heargues achieved its dominant position inthe PC world not least by commoditising

products such as the browser that arecomplementary to its cash cows such asWindows as their cost came down deshymand for Microsoftrsquos products went up

Similarly Googlersquos natural instinct is todo its utmost to encourage people to spendmore time online because that will givethe company more opportunities to selladvertisements and collect data aboutthem According to Mr Carr almost everyshything the company doesbuilding hugedata centres ghting copyright restrictionsdigitising the worldrsquos libraries developinga new browser and most recently evenhelping to launch satellitesis aimed at inshycreasing the use of the internet Googlewants information to be free he recentlywrote in his blog because as the cost of inshyformation falls it makes more money

But Google may never become as powshyerful as Microsoft because regulators areunlikely to let it Microsoft was eventuallyput in the dock for abusing its monopolybecause it got too greedy pushing most ofthe rest of the industry to complain Giventhat the world has already lived throughthe Microsoft drama and that Google willaect many more industries the searchcompany is likely to be restrained muchearlier The rm is currently in negotiationswith the US Justice Department about acontroversial advertising partnership beshytween itself and one of its competitors Yashyhoo which would further strengthenGooglersquos position in online advertising

Even if the economics of the cloud arestill in ux though it is already clear that itwill have farshyreaching implications forbusinesses and for society as a whole 7

12 A special report on corporate IT The Economist October 25th 2008

2

1

ing SAP the market leader in ERP is likepouring concrete into your company goesan old joke among IT types

This helps to explain why in manyrms IT departments and business unitshave traditionally been at loggerheads Inrecent years tensions have worsenedCompanies must grapple with evershychangshying markets and regulations yet IT budgetsare being cut Many rms now have a hugebacklog of IT projects

Hence the interest in cloud computingIt turns capital expenditure into operationshyal expenditure which makes things mucheasier and cheaper Instead of having toshell out a lot of money for say a server totest an application and even with luckwait a few weeks for it to be up and runshyning managers just have to whip out acredit card open an account at AmazonWeb Services (AWS) and re up a virtualmachine for a few dollars

In many rms senior managers probashybly do not even know that business unitsare using AWS or similar services In someorganisations however it has already beshycome a muchshyappreciated RampD tool Pharshymaceutical companies for instance areregularly tapping into AWS to calculatesimulations Sogeti a European consultanshycy has used a cloud built by IBM to allow itto test new ideas and quickly put togetheran IT system for a companyshywide brainshystorming event

Cloud services have also been hugelysuccessful with startshyups which can nowenjoy infrastructure of the same quality aslarge companies In fact AWS is probablythe main reason why there are now somany rms oering all kinds of Web 20services Their usefulness may sometimesbe hard to gauge but that is a good thing Itis a sign of lively combinatorial innovashytion made possible because entrepreshyneurs can cheaply try new combinationsof technology says Googlersquos Mr Varian

Many startshyups would probably noteven exist without the cloud Take Anishymoto a service that lets users turn photosinto artsy music videos using articial inshytelligence When it launched on Facebooka social network demand was such that ithad to increase the number of its virtualmachines on AWS from 50 to 3500 withinthree days You could give me unlimitedfunding says Adam Selipsky of AWSand I wouldnrsquot know how to deploy thatmany servers in 72 hours

Combinatorial innovation should alsobe made easier by the fact that the cloudwill be a huge collection of electronic sershyvices based on standards But this serviceshy

oriented architecture will be even moreimportant for existing rms because itshould free their inner workingstheirbusiness processesfrom the straitjacketof their ERP systems and allow these proshycesses to be more easily adapted for inshystance to launch a new product

Again the software industry has beenpromising this for some years under thebanner of serviceshyoriented architecturediscussed in an earlier chapter Yet theadoption of SOA has been slow and manyprojects have failed says Chris Howard ofthe Burton Group a consultancy The reashysons are not just technical but cultural forexample some business units are not usedto sharing data Cloud computing will helpresolve some of these problems Manywebshybased services are built to be integratshyed into existing business processes

Donrsquot do it yourselfWhat eect will all this have on the natureof the rm If IT systems really allow comshypanies to become more modular and exshyible this should foster further specialisashytion It will become even easier tooutsource business processes or at leastthose parts of them where rms do not enshyjoy a competitive advantage Companieswill increasingly focus on their core andshed the context in the words of Geofshyfrey Moore managing director of TCG Adshy

visors a consultancyThis also means that companies will

rely more on services provided by othersThey will increasingly form process netshyworks a term for loosely connectedgroupings of specialised rms coined byJohn Hagel a business strategist at Deloitteamp Touche an auditing rm His prime exshyample is Li amp Fung a company based inHong Kong that has assembled a globalprocess network of nearly 10000 businesspartners in the clothing industry fromwhich it puts together customised supplychains for clothes designers

Both trends could mean that in futurehuge cloudswhich might be called inshydustry operating systemswill providebasic services for a particular sector for inshystance nance or logistics On top of thesesystems will sit many specialised and inshyterconnected rms just like applicationson a computing platform Yet this is onlyhalf the story The cloud changes not onlythe plumbing and structure of rms andindustries known as the transactionallayer but also their interactional layera term coined by Andy Mulholland chieftechnologist of Capgemini a consultancyHe denes this as the environment whereall the interactions between people takeplace both within an organisation andwith its business partners

Despite all the technology that has enshy

The Economist October 25th 2008 A special report on corporate IT 13

2

1

READERS may be excused if they havenever heard of Kinakuta It is a tiny isshy

land dreamed up by Neal Stephenson inhis novel Cryptonomicon In the scishyenceshyction classic libertarian technoloshygists and entrepreneurs try to turn it into adata haven for such things as anonymousonline banking and electronic money

Reality has indeed caught up with fanshytasy Iceland is about to become a Kinakuta

of sorts Data Islandia a local company istrying to establish the island as a vault for agrowing pile of data that rms must retainin order to comply with all kinds of regulashytions It has a compelling pitch With itscool climate abundant geothermal energyand secure remoteness Iceland appears tobe a prime location for data archives

As often however truth is strangerthan ction In a way Data Islandia is erectshy

ing borders in the cloud it intends to storeEuropean data according to European regshyulation and American bits according toAmerican rules What is more to keep thedata safe during transport they are pickedup with a data scooter (in essence a conshytainer lled with disk drives) and taken toIceland by aeroplaneas though breshyopshytic links had never been invented

This illustrates the political tensions

Computers without borders

The cloud may be the ultimate form of globalisation

tered the workplace in recent years so farthis layer has not really changed PCs cershytainly made people more productive butmost of their programs were not designedfor collaboration The enterprise applicashytions they worked with were still centralshyised systems And eshymail has in some waysmade things worse as the ood of messhysages takes up lots of time and attention

The dominant model is still that peoplerst labour individually and then mergetheir respective eorts says Mr Mulholshyland Itrsquos not much dierent from the ageof paper he writes in his book Mesh Colshylaboration Collaboration often meanspulling up your chair next to your colshyleague so you can look at the same screen

Consumers have pulled ahead of comshypanies in using cloudshybased services thatallow for better collaboration such asblogs wikis and social networks The rstgeneration of people that has grown up usshying all these tools is now entering theworkforce Being used to a culture of sharshying information freely these digital nashytives will be impatient with the rules oftraditional corporate IT

So it is helpful that rms have at last beshygun to embrace Web 20 technologies inearnest a trend predictably called Entershyprise 20 By 2013 companies around theglobe will spend $46 billion on such toolsaccording to Forrester Research What noshybody knows is how rms will trade o theadvantages of letting employees collaboshyrate with the outside world against the asshysociated risks for instance that condenshytial information is leaked Because of suchsecurity concerns (see chart 8) many rmsblock access to such sites as Facebook oncompany computers

Companies may not have much choicebut to open up says Mr Mulholland Emshy

ployees will increasingly resist constraintson their use of technology and they willhave a growing need to reach beyond thecorporate rewall Twenty years ago he arshygues 80 of the knowledge that workersrequired to do their jobs resided withintheir company Now it is only 20 becausethe world is changing ever faster We needto be open to new and unknown connecshytions with people and content he says

Exploiting the mesh in the words ofMr Mulholland will also mean that emshyployees may build simple applications oftheir own that allow them quickly to autoshymate repeat tasks using internal and extershynal IT services A new product by SerenaSoftware called Mashup Composer gives aforetaste of things to come Using a visualinterface even the not so technically mindshyed can quickly put together a service todeal say with travel requests or approvedocuments

Yet the impact of the cloud will also befelt on a macroeconomic level Just as itmakes small rms more competitive itwill help developing economies to move

ahead The biggest promise is that it willmake computing cheaper and easier touseand thus allow it to penetrate newmarkets says Russ Daniels chief technolshyogy ocer for HPrsquos cloudshyservices strategy

Hop skip and jumpThe mobile phone has already enabled deshyveloping countries to skip xedshyline netshyworks Cloud computing could prove to bea similar leapfrog technology because itdispenses with the need to build a cumbershysome IT infrastructure Software developshyers from a developing country can buildjust as great an application on our platformas somebody who lives in Palo Alto saysMr Benio of Salesforce

Indeed countries such as India will cershytainly take a big chunk of the global marketfor cloud services Zoho a popular suite ofwebshybased applications is operated by anIndian company AdventNet Indian hospishytals are already oering specialised healthshycare services this way The insurance armof ICICI an Indian bank has used thetechnology to come up with innovativeservices such as a personalised insurancefor diabetes Premiums are adjusted deshypending on how well policyholders stickto a tness plan All this suggests that theeconomic impact of the cloud may be feltnot only in the IT industry itself but in othshyer sectors too The internet disrupted themusic business Google disrupted the meshydia cloudshybased companies could becomedisrupters in other inecient industriesBuzzwords such as Health Care 20Banking 20 or even Education 20could soon acquire real meaning

But given that the cloud is global by nashyture how might it be regulated The conshyclusion of this special report will oersome answers 7

8Dangers within

Source Forrester

Research

How IT organisations feel about risk ofemployee-driven unsanctioned use of Web 20June 2008

Survey of 242 US IT decision-makers

at companies with 500+ employees

0 10 20 30 40 50

Very concerned

Somewhat concerned

Somewhat unconcerned

Completely unconcerned

14 A special report on corporate IT The Economist October 25th 2008

2

Previous special reports and a list offorthcoming ones can be found online

wwweconomistcomspecialreports

Future special reportsCountries and regionsSpain November 8thRussia November 29thIndia December 13th

Business nance economics and ideasCars in the developing world November 15th The sea January 3rd 2009The future of nance Jan 31st 2009

wwweconomistcomrights

Oer to readersReprints of this special report are available at aprice of pound350 plus postage and packing A minimum order of ve copies is required

Corporate oerCustomisation options on corporate orders of 100or more are available Please contact us to discussyour requirements

Send all orders to

The Rights and Syndication Department26 Red Lion SquareLondon WC1R 4HQ

Tel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492eshymail rightseconomistcom

For more information and to order special reportsand reprints online please visit our website

that will arise with the cloud In one way itis the ultimate form of globalisation vastvirtualised computer systems and elecshytronic services know no borders Yet govshyernments are likely to go to great lengths toavoid losing even more control

When the internet went mainstream inthe late 1990s libertarian thinkers arguedthat cyberspace was a distinct place callingfor laws and legal institutions of its ownAfter all they said it was built in such away that it interprets censorship as damshyage and routes around it But many govshyernments quickly found ways to blockcontent they deemed oensive Just look atChina and its great rewall

Controlling where data are stored andhow they are treated is harder though beshycause information can oat freely in thecloud And it is not just undemocratic govshyernments that want to control their citishyzensrsquo and companiesrsquo data indeed thereare nearly as many sets of data regulationas there are countries If we wanted to beon the safe side in terms of regulation weprobably would need 95 individual datacentres says Chuck Hollis a technologistat EMC the leading maker of storage gearwhich owns Mozy a cloud service that alshylows users to back up their data

There are technological xes to this proshyblem too Customers of Amazonrsquos storageservice for instance can have their datakept either in an American or a Europeandata centre In future cloud providers willoer many more options for where dataare kept and how they are protected Itseems possible that data as well as content

will eventually travel with security locashytion and expiry policies attached

It is when computers become virtualmachines that things get really trickyThese days IT systems are at the core ofmany companiesand just like data thesesystems can now live in a variety of placesWhat happens if they start to migrate toanother country where power is cheaperor regulation laxer Similarly if servicesare a combination of elements provided indierent jurisdictions who is liable ifsomething goes wrong

The cloudrsquos potential political and soshycial eect is only now entering the publicdebate IT rms are putting it on the agendaon both sides of the Atlantic In midshySepshytember for instance Google organised adiscussion on the subject in WashingtonDC A few days later SAP presented a whitepaper in Brussels pointing out that policyshymakers are not aware of the dramatic ecoshynomic impact of the Future Internet asthe paper calls the cloud

IT industry leaders note that ocialsfrom many countries have begun to takean interest in the cloud Some just wantdata centres to be built in their country tocreate jobs others are concerned about isshysues of law enforcement and jurisdictionThe danger they say is that cloud providshyers might be obliged to build more datacentres than are needed and have to comshyply with many dierent regulatory reshygimes Some of them have been oatingthe idea of freeshytrade zones for data censhytres where common rules would apply

Yet such ideas appear at odds with anshyother big question that could keep thecloud from growing how to protect prishyvacy Consumers expect their informashy

tion will be treated the same way on thecloud as if it were stored at home on theirown computers says Ari Schwartz of theCenter for Democracy and Technology anadvocacy group Many of the devices thatfeed into it such as sensors and cameraswill be intrusive For example Googlersquosvans go round taking streetshybyshystreet picshytures of cities for the companyrsquos onlinemap service called Streetview The picshytures are meant to help people nd theirway around but also often show passshyersshyby in embarrassing situations To proshytect their identity Google now blurs theirfaces and licence plates

Hands o my dataBut it is not only personal information thatcould get out into the open Privacy is aworry for companies tooand not just beshycause criminals or spies might intercepttheir data Once they are in the cloud govshyernments can also get their hands on themmore easily SWIFT the organisation thatmanages international bank transfers isplanning to build a data centre in neutralSwitzerland That will allow it to keep dataabout European transfers on the old contishynent where it cannot be subpoenaed bythe American government Webshybased eshymail is not safe either Thanks to the StoredCommunications Act American law enshyforcers can read peoplersquos messagesanddo not even have to tell the recipient

Just as too much regulation may keepthe cloud from rising high so could lack ofprivacy If consumers and companies canshynot be sure that their information is safethey will err on the side of caution But deshyspite all the caveats the precipitation fromthe cloud will be huge 7

The Economist October 25th 2008 A special report on corporate IT 9

1

EVEN elephants can die In 1993 extincshytion came close for IBM then the

worldrsquos largest computershymaker (it hassince been overtaken by HP) Its mainshyframe business was collapsing and protswere plummeting At that point LouisGerstner took over as chief executive andmanaged to turn the company aroundOnly a handful of people understandhow precariously close IBM came to runshyning out of cash in 1993 he writes in hismemoir Who Says Elephants CanrsquotDance Whether we would have had tole for bankruptcy I canrsquot say

There are many reasons why IBM nearshyly went bellyshyup not least the fact that BigBlue had become a bureaucratic monsterBut most critically it had failed to adapt tothe industryrsquos rst big platform shiftwhich only really made itself felt in the earshyly 1990s the move from mainframes tosmaller machines rst soshycalled minicomshyputers then personal computers IBMwas slow very slow in delivering distrishybuted computing and many small compashynies moved in to ll the gap Mr Gerstnerwrites

It is unlikely that the move into thecloud will produce a similar nearshydeath exshyperience or even a real casualtyif only beshycause IBM still stands as a warning Butthat does not mean that the structure of theIT industry will remain unchanged northat the economics will stay the sameOnce the IT sky really clouds over individshy

ual rmsrsquo share of the global IT budget (seechart 6) will shift

The move to distributed computingwhich started in the midshy1980s led to a bigchange in the IT industry In the era of themainframe computing came in a verticallyintegrated package mainly from IBM Withdistributed computing the industry beshycame a stack of horizontal layers In corshyporate IT these were mainly hardware thenetwork infrastructure software (such asoperating systems and databases) entershyprise applications and IT services

Not all of these layers were createdequal Computershymakers commanded athicker one for instance but software comshypanies were more protable The key proshygram was the operating system both onservers and on personal computers (clishyents) It was the standard to which othercomponents of IT systems had to conformUsually this was a version of Windowswhich made Microsoft the IBM of this newera of computing

Cloud computing is unlikely to bringabout quite such a dramatic shift In esshysence what it does is take the idea of distrishybuted computing a step farther Still it willadd a couple of layers to the IT stack One ismade up of the cloud providers such asAmazon and Google The other is softwarethat helps rms to turn their IT infrastrucshyture into their own cloud known as a virshytual operating system for data centres

Drawing a neat diagram of the IT stack

will also become increasingly dicult beshycause the layers are becoming less distinctIn a world of services it often does notmake sense to think of hardware and softshyware separately argues Padmasree Warshyrior the chief technology ocer of CiscoBoth need to be blended to oer new sershyvices she says

Mix and matchEven though the IT stack may not changeall that much the perceived value of thedierent layers will shift and with it theamount of prot IT rms can make fromeach of them Who will lose and who willwin depends on how much of computing

Highs and lows

As IT gets cloudier the economics of the business will change

6Follow the money

Source Gartner Forecast

Worldwide end-user spending $trn

2006 07 08 090

1

2

3

4

Computer hardware

Software

IT services

Telecomsequipment

Telecoms services

10 A special report on corporate IT The Economist October 25th 2008

2

1

eventually moves into the cloud In the rst round almost everybody in

the IT industry will do well as the cloudsare being built The biggest winners arelikely to be hardwareshymakers says MarkStahlman of Gartner Hardware alwayswins when new demand for computing isuncovered And we havenrsquot had such asweeping global demand since the 1990s

But in the longer term there will be relashytive winners and losers The hardwarebusiness could actually nd itself in thelosing group Its margins could getsqueezed as cloud computing matures beshycause there will be fewer customers withmore buying power says James Staten ofForrester Research Large cloud providerscan dictate how to build servers and atwhat price he notes

All that may explain why hardwareshymakers were among the rst to jump onthe cloudshycomputing bandwagon So farthey have done only what Mr Staten callscloudshywashing relabelling existing proshyducts that help customers build a moreexible IT infrastructure But they are alsopreparing for a time when more moneycan be made building clouds than buildingcomputers IBM and HP for instance haveteamed up with other rms and universishyties to design new cloud architectures

Which side of the fenceIn the long run says Mr Staten hardwareshymakers may be torn between supplyingcloud providers or becoming providersthemselves Being both will not be easybecause the rms would be competingwith their biggest customers Dell seems tohave decided to be a cloud supplier SunMicrosystems is a candidate to become aprovider it is oering a cloudshylike servicecalled Networkcom albeit not very sucshycessfully HP and IBM already used to thebalancing act of selling hardware and proshyviding IT services will try to do both

Makers of traditional software will ndthe going even tougher With the advent ofopenshysource software in particular Linuxselling operating systems had already beshycome less protable In a virtual worldthey will become even more commodishytised which is bad news for MicrosoftMany business applications no longerneed a big generalshypurpose server operatshying system but can use a specialised onewhich should put pressure on prices Onclient computers more and more applicashytions are written to run in browsers not onany particular operating system

Makers of business applications arealso on the defensive Traditionally they

have made billions by selling their proshygrams often demanding hefty sums to inshystall them and then charging an annualmaintenance fee for upgrades and technishycal support But this highly lucrative busishyness model has come under increasingpressure says Michael Cusumano a proshyfessor at the Massachusetts Institute ofTechnology (MIT)

For one he says software vendors willhave to nd new ways to charge for theirwares in the cloud tying licensing fees tothe number of users for instance will bedicult since services will mostly be conshysumed by other machines More imporshytantly the corporate world has becomeless and less willing to buy software forlarge sums of money so software rms listshyed on Americarsquos stockmarkets now makemost of their prots from maintenanceand other services (see chart 7) SAP will inshycrease its annual maintenance fees to atleast 22 of a programrsquos value over thenext few years in line with those of Oracleits main rival

Yet the biggest challenge for softwarerms is to become providers of online sershyvices themselves says Brent Thill of Citi Inshyvestment Research So far they havemoved slowly oering SaaS only on theside if at all This was partly because theircustomers were not that keen But moreimportantly notes Mr Thill the softwarehouses are still wedded to their old busishyness model With SaaS they do not get a bigupfront payment only subscription fees

Once Salesforce and NetSuite hadshown that the SaaS model works the inshycumbents began to move faster In Septemshyber last year for instance SAP presentedBusiness ByDesign a package of webshybased enterprise applications for smallerbusinesses But success will not come easishyly SAP has slowed down the introductionof the new service because it still needs towork out how to run it cheaply enough tomake a reasonable prot

Pure SaaS providers also have a lot ontheir minds Some experts such as JoshuaGreenbaum of Enterprise ApplicationsConsulting reckon that few will ever be asprotable as traditional software rms Alshythough it is almost a decade old Salesforcestarted making money only in 2006 mainshyly because it rst had to spend heavily onmarketing to attract customers But nowthat the service has 1m users and revenuesof more than $1 billion these costs willcome down says the rm

The companies that have the bestchance of making money from the cloudare those that get things to connect and

work together and help customers movetheir computing around This is music tothe ears of big IT rms not least IBM Nearshyly 80 of its revenues come from infrashystructure software and IT services which itcan oer globally HP is catching up havingtaken over EDS another big ITshyservicesrm Both Microsoft and SAP for their partbelieve that rms will want to have achoice in where to do their computing aswell as the exibility to move thingsaround over time

Two potentially important contestantsare rarely mentioned Cisco and EMC theleading makers of networking and storagegear respectively Having invested a lot insoftware and services Cisco has becomemore than just the source of most of theworldrsquos routers the trac cops of the intershynet It is betting that in the cloud the netshywork layer will become more importantfor instance to ensure that computingworkloads are able to move around seshycurely EMC for its part has made two dozshyen cloudshyrelated investments andlaunched a cloudshyinfrastructure division

Whoever manages to own the domishynant operating system for the data centrecould become a big winner VMware isbound to have a shot at this As well as beshying the market leader in virtualisation ithas the support of EMC which holds 86of the rm But the competition is likely tobe intense

Will this prospective platform war proshyduce a dominant company in the mould ofIBM or Microsoft that is able to extractmore than its fair share of the prots Probshyably not because it will be relatively easyto switch between vendors says GeorgeGilbert of Tech Strategy Partners a consulshytancy Nor is it likely that one rm willmanage to build a global cloud monopolyAlthough there are important economiesof scale in building a network of data censhy

7Serving up a treat

Source Michael Cusumano

Massachusetts Institute of Technology

US-listed software-firmsrsquo sales of total

1990 92 94 96 98 02 042000 06

03

04

05

06

07

Services

Products

The Economist October 25th 2008 A special report on corporate IT 11

2

1

BUSINESSES as well as most organishysations outside the business world

begin to shift from hierarchical processesto networked ones Nearly every facet ofhuman activity is transformed in someway by the emergent fabric of interconnecshytion This reorganisation leads to dramaticimprovements in eciency and producshytivity So said Wired magazine the centralorgan of Web 10 in July 1997 in an essay enshytitled The Long Boom arguing that theworld was in for 25 years of prosperityfreedom and a better environment Backthen the article reected the general optishy

mism that led up to the internet bubbleNow after two busts several wars andgrowing fears of global warming it makesfor somewhat surreal reading

The cloud lends itself to similar hypershybole Yet so far there has not been much deshybate about its economic falloutprobablybecause the new economy ended badlyand the newest one is currently doing evenworse There will be many ways in whichthe cloud will change businesses and theeconomy most of them hard to predict butone theme is already emerging Businessesare becoming more like the technology itshy

self more adaptable more interwovenand more specialised These developshyments may not be new but cloud computshying will speed them up

Corporate IT has always promised tomake companies more agile In the 1990smany companies reshyengineered their busishyness processes when they started using aform of software called enterpriseshyreshysource planning (ERP) which does thingssuch as managing a rmrsquos nances andemployees But once these massive softshyware packages were in place it was exceedshyingly dicult to change them Implementshy

The long nimbus

The cloud will make businesses more adaptable interconnected and specialisedand often smaller

tres the computing needs of companiesand consumers vary too widely for onesize to t all

Even if the cloud is likely to transformthe IT industry some things will stay thesame One is the importance of lockshyin Ifanything companies and developers willbe even more dependent on cloud platshyforms and applications than they are onthe old kind SaaS promotes the hollowshying out of IT a rm that needs to migrateto another system will no longer have therequired expertise When Facebook saymakes a change to its platform developershave no choice but to go along with itSome are already calling for a CloudComputing Consortium in the mould ofthe World Wide Web Consortium (W3C)to set standards that allow applications tomigrate easily from one platform to anothshyer One standard initiative called OpenshySocial already allows the same webshybased application to run in several socialnetworks which are also clouds of sorts

But standards go only so far Some fearthat one company could try to monopoliseother key parts of the cloud ironically Mishycrosoft worries that Google is doing exactshyly that with the online advertising marketTo Steve Ballmer Microsoftrsquos boss Gooshyglersquos advertising platform is like a ywheelthat picks up speed as more websites atshytract more advertisers and vice versa

Eric Schmidt Googlersquos chief executivedenies any evil intent to achieve worlddomination He argues with some justicethat it would be hard for Google to controlthe cloud if only for technical reasonsmuch of it is already based on open stanshy

dards and its loose structure does not lenditself to locking customers in

Mr Schmidt promises that Google willnot lock its users in either Our competishytive advantage is not from lockshyin he saysbut from having specialised knowledgeof how to build data centres and how tobuild new software that is not reproducshyible such as our search algorithm This ishow we make our money

Yet Google is more like Microsoft than itlikes to admit says Nicholas Carr a techshynology writer and blogger Microsoft heargues achieved its dominant position inthe PC world not least by commoditising

products such as the browser that arecomplementary to its cash cows such asWindows as their cost came down deshymand for Microsoftrsquos products went up

Similarly Googlersquos natural instinct is todo its utmost to encourage people to spendmore time online because that will givethe company more opportunities to selladvertisements and collect data aboutthem According to Mr Carr almost everyshything the company doesbuilding hugedata centres ghting copyright restrictionsdigitising the worldrsquos libraries developinga new browser and most recently evenhelping to launch satellitesis aimed at inshycreasing the use of the internet Googlewants information to be free he recentlywrote in his blog because as the cost of inshyformation falls it makes more money

But Google may never become as powshyerful as Microsoft because regulators areunlikely to let it Microsoft was eventuallyput in the dock for abusing its monopolybecause it got too greedy pushing most ofthe rest of the industry to complain Giventhat the world has already lived throughthe Microsoft drama and that Google willaect many more industries the searchcompany is likely to be restrained muchearlier The rm is currently in negotiationswith the US Justice Department about acontroversial advertising partnership beshytween itself and one of its competitors Yashyhoo which would further strengthenGooglersquos position in online advertising

Even if the economics of the cloud arestill in ux though it is already clear that itwill have farshyreaching implications forbusinesses and for society as a whole 7

12 A special report on corporate IT The Economist October 25th 2008

2

1

ing SAP the market leader in ERP is likepouring concrete into your company goesan old joke among IT types

This helps to explain why in manyrms IT departments and business unitshave traditionally been at loggerheads Inrecent years tensions have worsenedCompanies must grapple with evershychangshying markets and regulations yet IT budgetsare being cut Many rms now have a hugebacklog of IT projects

Hence the interest in cloud computingIt turns capital expenditure into operationshyal expenditure which makes things mucheasier and cheaper Instead of having toshell out a lot of money for say a server totest an application and even with luckwait a few weeks for it to be up and runshyning managers just have to whip out acredit card open an account at AmazonWeb Services (AWS) and re up a virtualmachine for a few dollars

In many rms senior managers probashybly do not even know that business unitsare using AWS or similar services In someorganisations however it has already beshycome a muchshyappreciated RampD tool Pharshymaceutical companies for instance areregularly tapping into AWS to calculatesimulations Sogeti a European consultanshycy has used a cloud built by IBM to allow itto test new ideas and quickly put togetheran IT system for a companyshywide brainshystorming event

Cloud services have also been hugelysuccessful with startshyups which can nowenjoy infrastructure of the same quality aslarge companies In fact AWS is probablythe main reason why there are now somany rms oering all kinds of Web 20services Their usefulness may sometimesbe hard to gauge but that is a good thing Itis a sign of lively combinatorial innovashytion made possible because entrepreshyneurs can cheaply try new combinationsof technology says Googlersquos Mr Varian

Many startshyups would probably noteven exist without the cloud Take Anishymoto a service that lets users turn photosinto artsy music videos using articial inshytelligence When it launched on Facebooka social network demand was such that ithad to increase the number of its virtualmachines on AWS from 50 to 3500 withinthree days You could give me unlimitedfunding says Adam Selipsky of AWSand I wouldnrsquot know how to deploy thatmany servers in 72 hours

Combinatorial innovation should alsobe made easier by the fact that the cloudwill be a huge collection of electronic sershyvices based on standards But this serviceshy

oriented architecture will be even moreimportant for existing rms because itshould free their inner workingstheirbusiness processesfrom the straitjacketof their ERP systems and allow these proshycesses to be more easily adapted for inshystance to launch a new product

Again the software industry has beenpromising this for some years under thebanner of serviceshyoriented architecturediscussed in an earlier chapter Yet theadoption of SOA has been slow and manyprojects have failed says Chris Howard ofthe Burton Group a consultancy The reashysons are not just technical but cultural forexample some business units are not usedto sharing data Cloud computing will helpresolve some of these problems Manywebshybased services are built to be integratshyed into existing business processes

Donrsquot do it yourselfWhat eect will all this have on the natureof the rm If IT systems really allow comshypanies to become more modular and exshyible this should foster further specialisashytion It will become even easier tooutsource business processes or at leastthose parts of them where rms do not enshyjoy a competitive advantage Companieswill increasingly focus on their core andshed the context in the words of Geofshyfrey Moore managing director of TCG Adshy

visors a consultancyThis also means that companies will

rely more on services provided by othersThey will increasingly form process netshyworks a term for loosely connectedgroupings of specialised rms coined byJohn Hagel a business strategist at Deloitteamp Touche an auditing rm His prime exshyample is Li amp Fung a company based inHong Kong that has assembled a globalprocess network of nearly 10000 businesspartners in the clothing industry fromwhich it puts together customised supplychains for clothes designers

Both trends could mean that in futurehuge cloudswhich might be called inshydustry operating systemswill providebasic services for a particular sector for inshystance nance or logistics On top of thesesystems will sit many specialised and inshyterconnected rms just like applicationson a computing platform Yet this is onlyhalf the story The cloud changes not onlythe plumbing and structure of rms andindustries known as the transactionallayer but also their interactional layera term coined by Andy Mulholland chieftechnologist of Capgemini a consultancyHe denes this as the environment whereall the interactions between people takeplace both within an organisation andwith its business partners

Despite all the technology that has enshy

The Economist October 25th 2008 A special report on corporate IT 13

2

1

READERS may be excused if they havenever heard of Kinakuta It is a tiny isshy

land dreamed up by Neal Stephenson inhis novel Cryptonomicon In the scishyenceshyction classic libertarian technoloshygists and entrepreneurs try to turn it into adata haven for such things as anonymousonline banking and electronic money

Reality has indeed caught up with fanshytasy Iceland is about to become a Kinakuta

of sorts Data Islandia a local company istrying to establish the island as a vault for agrowing pile of data that rms must retainin order to comply with all kinds of regulashytions It has a compelling pitch With itscool climate abundant geothermal energyand secure remoteness Iceland appears tobe a prime location for data archives

As often however truth is strangerthan ction In a way Data Islandia is erectshy

ing borders in the cloud it intends to storeEuropean data according to European regshyulation and American bits according toAmerican rules What is more to keep thedata safe during transport they are pickedup with a data scooter (in essence a conshytainer lled with disk drives) and taken toIceland by aeroplaneas though breshyopshytic links had never been invented

This illustrates the political tensions

Computers without borders

The cloud may be the ultimate form of globalisation

tered the workplace in recent years so farthis layer has not really changed PCs cershytainly made people more productive butmost of their programs were not designedfor collaboration The enterprise applicashytions they worked with were still centralshyised systems And eshymail has in some waysmade things worse as the ood of messhysages takes up lots of time and attention

The dominant model is still that peoplerst labour individually and then mergetheir respective eorts says Mr Mulholshyland Itrsquos not much dierent from the ageof paper he writes in his book Mesh Colshylaboration Collaboration often meanspulling up your chair next to your colshyleague so you can look at the same screen

Consumers have pulled ahead of comshypanies in using cloudshybased services thatallow for better collaboration such asblogs wikis and social networks The rstgeneration of people that has grown up usshying all these tools is now entering theworkforce Being used to a culture of sharshying information freely these digital nashytives will be impatient with the rules oftraditional corporate IT

So it is helpful that rms have at last beshygun to embrace Web 20 technologies inearnest a trend predictably called Entershyprise 20 By 2013 companies around theglobe will spend $46 billion on such toolsaccording to Forrester Research What noshybody knows is how rms will trade o theadvantages of letting employees collaboshyrate with the outside world against the asshysociated risks for instance that condenshytial information is leaked Because of suchsecurity concerns (see chart 8) many rmsblock access to such sites as Facebook oncompany computers

Companies may not have much choicebut to open up says Mr Mulholland Emshy

ployees will increasingly resist constraintson their use of technology and they willhave a growing need to reach beyond thecorporate rewall Twenty years ago he arshygues 80 of the knowledge that workersrequired to do their jobs resided withintheir company Now it is only 20 becausethe world is changing ever faster We needto be open to new and unknown connecshytions with people and content he says

Exploiting the mesh in the words ofMr Mulholland will also mean that emshyployees may build simple applications oftheir own that allow them quickly to autoshymate repeat tasks using internal and extershynal IT services A new product by SerenaSoftware called Mashup Composer gives aforetaste of things to come Using a visualinterface even the not so technically mindshyed can quickly put together a service todeal say with travel requests or approvedocuments

Yet the impact of the cloud will also befelt on a macroeconomic level Just as itmakes small rms more competitive itwill help developing economies to move

ahead The biggest promise is that it willmake computing cheaper and easier touseand thus allow it to penetrate newmarkets says Russ Daniels chief technolshyogy ocer for HPrsquos cloudshyservices strategy

Hop skip and jumpThe mobile phone has already enabled deshyveloping countries to skip xedshyline netshyworks Cloud computing could prove to bea similar leapfrog technology because itdispenses with the need to build a cumbershysome IT infrastructure Software developshyers from a developing country can buildjust as great an application on our platformas somebody who lives in Palo Alto saysMr Benio of Salesforce

Indeed countries such as India will cershytainly take a big chunk of the global marketfor cloud services Zoho a popular suite ofwebshybased applications is operated by anIndian company AdventNet Indian hospishytals are already oering specialised healthshycare services this way The insurance armof ICICI an Indian bank has used thetechnology to come up with innovativeservices such as a personalised insurancefor diabetes Premiums are adjusted deshypending on how well policyholders stickto a tness plan All this suggests that theeconomic impact of the cloud may be feltnot only in the IT industry itself but in othshyer sectors too The internet disrupted themusic business Google disrupted the meshydia cloudshybased companies could becomedisrupters in other inecient industriesBuzzwords such as Health Care 20Banking 20 or even Education 20could soon acquire real meaning

But given that the cloud is global by nashyture how might it be regulated The conshyclusion of this special report will oersome answers 7

8Dangers within

Source Forrester

Research

How IT organisations feel about risk ofemployee-driven unsanctioned use of Web 20June 2008

Survey of 242 US IT decision-makers

at companies with 500+ employees

0 10 20 30 40 50

Very concerned

Somewhat concerned

Somewhat unconcerned

Completely unconcerned

14 A special report on corporate IT The Economist October 25th 2008

2

Previous special reports and a list offorthcoming ones can be found online

wwweconomistcomspecialreports

Future special reportsCountries and regionsSpain November 8thRussia November 29thIndia December 13th

Business nance economics and ideasCars in the developing world November 15th The sea January 3rd 2009The future of nance Jan 31st 2009

wwweconomistcomrights

Oer to readersReprints of this special report are available at aprice of pound350 plus postage and packing A minimum order of ve copies is required

Corporate oerCustomisation options on corporate orders of 100or more are available Please contact us to discussyour requirements

Send all orders to

The Rights and Syndication Department26 Red Lion SquareLondon WC1R 4HQ

Tel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492eshymail rightseconomistcom

For more information and to order special reportsand reprints online please visit our website

that will arise with the cloud In one way itis the ultimate form of globalisation vastvirtualised computer systems and elecshytronic services know no borders Yet govshyernments are likely to go to great lengths toavoid losing even more control

When the internet went mainstream inthe late 1990s libertarian thinkers arguedthat cyberspace was a distinct place callingfor laws and legal institutions of its ownAfter all they said it was built in such away that it interprets censorship as damshyage and routes around it But many govshyernments quickly found ways to blockcontent they deemed oensive Just look atChina and its great rewall

Controlling where data are stored andhow they are treated is harder though beshycause information can oat freely in thecloud And it is not just undemocratic govshyernments that want to control their citishyzensrsquo and companiesrsquo data indeed thereare nearly as many sets of data regulationas there are countries If we wanted to beon the safe side in terms of regulation weprobably would need 95 individual datacentres says Chuck Hollis a technologistat EMC the leading maker of storage gearwhich owns Mozy a cloud service that alshylows users to back up their data

There are technological xes to this proshyblem too Customers of Amazonrsquos storageservice for instance can have their datakept either in an American or a Europeandata centre In future cloud providers willoer many more options for where dataare kept and how they are protected Itseems possible that data as well as content

will eventually travel with security locashytion and expiry policies attached

It is when computers become virtualmachines that things get really trickyThese days IT systems are at the core ofmany companiesand just like data thesesystems can now live in a variety of placesWhat happens if they start to migrate toanother country where power is cheaperor regulation laxer Similarly if servicesare a combination of elements provided indierent jurisdictions who is liable ifsomething goes wrong

The cloudrsquos potential political and soshycial eect is only now entering the publicdebate IT rms are putting it on the agendaon both sides of the Atlantic In midshySepshytember for instance Google organised adiscussion on the subject in WashingtonDC A few days later SAP presented a whitepaper in Brussels pointing out that policyshymakers are not aware of the dramatic ecoshynomic impact of the Future Internet asthe paper calls the cloud

IT industry leaders note that ocialsfrom many countries have begun to takean interest in the cloud Some just wantdata centres to be built in their country tocreate jobs others are concerned about isshysues of law enforcement and jurisdictionThe danger they say is that cloud providshyers might be obliged to build more datacentres than are needed and have to comshyply with many dierent regulatory reshygimes Some of them have been oatingthe idea of freeshytrade zones for data censhytres where common rules would apply

Yet such ideas appear at odds with anshyother big question that could keep thecloud from growing how to protect prishyvacy Consumers expect their informashy

tion will be treated the same way on thecloud as if it were stored at home on theirown computers says Ari Schwartz of theCenter for Democracy and Technology anadvocacy group Many of the devices thatfeed into it such as sensors and cameraswill be intrusive For example Googlersquosvans go round taking streetshybyshystreet picshytures of cities for the companyrsquos onlinemap service called Streetview The picshytures are meant to help people nd theirway around but also often show passshyersshyby in embarrassing situations To proshytect their identity Google now blurs theirfaces and licence plates

Hands o my dataBut it is not only personal information thatcould get out into the open Privacy is aworry for companies tooand not just beshycause criminals or spies might intercepttheir data Once they are in the cloud govshyernments can also get their hands on themmore easily SWIFT the organisation thatmanages international bank transfers isplanning to build a data centre in neutralSwitzerland That will allow it to keep dataabout European transfers on the old contishynent where it cannot be subpoenaed bythe American government Webshybased eshymail is not safe either Thanks to the StoredCommunications Act American law enshyforcers can read peoplersquos messagesanddo not even have to tell the recipient

Just as too much regulation may keepthe cloud from rising high so could lack ofprivacy If consumers and companies canshynot be sure that their information is safethey will err on the side of caution But deshyspite all the caveats the precipitation fromthe cloud will be huge 7

10 A special report on corporate IT The Economist October 25th 2008

2

1

eventually moves into the cloud In the rst round almost everybody in

the IT industry will do well as the cloudsare being built The biggest winners arelikely to be hardwareshymakers says MarkStahlman of Gartner Hardware alwayswins when new demand for computing isuncovered And we havenrsquot had such asweeping global demand since the 1990s

But in the longer term there will be relashytive winners and losers The hardwarebusiness could actually nd itself in thelosing group Its margins could getsqueezed as cloud computing matures beshycause there will be fewer customers withmore buying power says James Staten ofForrester Research Large cloud providerscan dictate how to build servers and atwhat price he notes

All that may explain why hardwareshymakers were among the rst to jump onthe cloudshycomputing bandwagon So farthey have done only what Mr Staten callscloudshywashing relabelling existing proshyducts that help customers build a moreexible IT infrastructure But they are alsopreparing for a time when more moneycan be made building clouds than buildingcomputers IBM and HP for instance haveteamed up with other rms and universishyties to design new cloud architectures

Which side of the fenceIn the long run says Mr Staten hardwareshymakers may be torn between supplyingcloud providers or becoming providersthemselves Being both will not be easybecause the rms would be competingwith their biggest customers Dell seems tohave decided to be a cloud supplier SunMicrosystems is a candidate to become aprovider it is oering a cloudshylike servicecalled Networkcom albeit not very sucshycessfully HP and IBM already used to thebalancing act of selling hardware and proshyviding IT services will try to do both

Makers of traditional software will ndthe going even tougher With the advent ofopenshysource software in particular Linuxselling operating systems had already beshycome less protable In a virtual worldthey will become even more commodishytised which is bad news for MicrosoftMany business applications no longerneed a big generalshypurpose server operatshying system but can use a specialised onewhich should put pressure on prices Onclient computers more and more applicashytions are written to run in browsers not onany particular operating system

Makers of business applications arealso on the defensive Traditionally they

have made billions by selling their proshygrams often demanding hefty sums to inshystall them and then charging an annualmaintenance fee for upgrades and technishycal support But this highly lucrative busishyness model has come under increasingpressure says Michael Cusumano a proshyfessor at the Massachusetts Institute ofTechnology (MIT)

For one he says software vendors willhave to nd new ways to charge for theirwares in the cloud tying licensing fees tothe number of users for instance will bedicult since services will mostly be conshysumed by other machines More imporshytantly the corporate world has becomeless and less willing to buy software forlarge sums of money so software rms listshyed on Americarsquos stockmarkets now makemost of their prots from maintenanceand other services (see chart 7) SAP will inshycrease its annual maintenance fees to atleast 22 of a programrsquos value over thenext few years in line with those of Oracleits main rival

Yet the biggest challenge for softwarerms is to become providers of online sershyvices themselves says Brent Thill of Citi Inshyvestment Research So far they havemoved slowly oering SaaS only on theside if at all This was partly because theircustomers were not that keen But moreimportantly notes Mr Thill the softwarehouses are still wedded to their old busishyness model With SaaS they do not get a bigupfront payment only subscription fees

Once Salesforce and NetSuite hadshown that the SaaS model works the inshycumbents began to move faster In Septemshyber last year for instance SAP presentedBusiness ByDesign a package of webshybased enterprise applications for smallerbusinesses But success will not come easishyly SAP has slowed down the introductionof the new service because it still needs towork out how to run it cheaply enough tomake a reasonable prot

Pure SaaS providers also have a lot ontheir minds Some experts such as JoshuaGreenbaum of Enterprise ApplicationsConsulting reckon that few will ever be asprotable as traditional software rms Alshythough it is almost a decade old Salesforcestarted making money only in 2006 mainshyly because it rst had to spend heavily onmarketing to attract customers But nowthat the service has 1m users and revenuesof more than $1 billion these costs willcome down says the rm

The companies that have the bestchance of making money from the cloudare those that get things to connect and

work together and help customers movetheir computing around This is music tothe ears of big IT rms not least IBM Nearshyly 80 of its revenues come from infrashystructure software and IT services which itcan oer globally HP is catching up havingtaken over EDS another big ITshyservicesrm Both Microsoft and SAP for their partbelieve that rms will want to have achoice in where to do their computing aswell as the exibility to move thingsaround over time

Two potentially important contestantsare rarely mentioned Cisco and EMC theleading makers of networking and storagegear respectively Having invested a lot insoftware and services Cisco has becomemore than just the source of most of theworldrsquos routers the trac cops of the intershynet It is betting that in the cloud the netshywork layer will become more importantfor instance to ensure that computingworkloads are able to move around seshycurely EMC for its part has made two dozshyen cloudshyrelated investments andlaunched a cloudshyinfrastructure division

Whoever manages to own the domishynant operating system for the data centrecould become a big winner VMware isbound to have a shot at this As well as beshying the market leader in virtualisation ithas the support of EMC which holds 86of the rm But the competition is likely tobe intense

Will this prospective platform war proshyduce a dominant company in the mould ofIBM or Microsoft that is able to extractmore than its fair share of the prots Probshyably not because it will be relatively easyto switch between vendors says GeorgeGilbert of Tech Strategy Partners a consulshytancy Nor is it likely that one rm willmanage to build a global cloud monopolyAlthough there are important economiesof scale in building a network of data censhy

7Serving up a treat

Source Michael Cusumano

Massachusetts Institute of Technology

US-listed software-firmsrsquo sales of total

1990 92 94 96 98 02 042000 06

03

04

05

06

07

Services

Products

The Economist October 25th 2008 A special report on corporate IT 11

2

1

BUSINESSES as well as most organishysations outside the business world

begin to shift from hierarchical processesto networked ones Nearly every facet ofhuman activity is transformed in someway by the emergent fabric of interconnecshytion This reorganisation leads to dramaticimprovements in eciency and producshytivity So said Wired magazine the centralorgan of Web 10 in July 1997 in an essay enshytitled The Long Boom arguing that theworld was in for 25 years of prosperityfreedom and a better environment Backthen the article reected the general optishy

mism that led up to the internet bubbleNow after two busts several wars andgrowing fears of global warming it makesfor somewhat surreal reading

The cloud lends itself to similar hypershybole Yet so far there has not been much deshybate about its economic falloutprobablybecause the new economy ended badlyand the newest one is currently doing evenworse There will be many ways in whichthe cloud will change businesses and theeconomy most of them hard to predict butone theme is already emerging Businessesare becoming more like the technology itshy

self more adaptable more interwovenand more specialised These developshyments may not be new but cloud computshying will speed them up

Corporate IT has always promised tomake companies more agile In the 1990smany companies reshyengineered their busishyness processes when they started using aform of software called enterpriseshyreshysource planning (ERP) which does thingssuch as managing a rmrsquos nances andemployees But once these massive softshyware packages were in place it was exceedshyingly dicult to change them Implementshy

The long nimbus

The cloud will make businesses more adaptable interconnected and specialisedand often smaller

tres the computing needs of companiesand consumers vary too widely for onesize to t all

Even if the cloud is likely to transformthe IT industry some things will stay thesame One is the importance of lockshyin Ifanything companies and developers willbe even more dependent on cloud platshyforms and applications than they are onthe old kind SaaS promotes the hollowshying out of IT a rm that needs to migrateto another system will no longer have therequired expertise When Facebook saymakes a change to its platform developershave no choice but to go along with itSome are already calling for a CloudComputing Consortium in the mould ofthe World Wide Web Consortium (W3C)to set standards that allow applications tomigrate easily from one platform to anothshyer One standard initiative called OpenshySocial already allows the same webshybased application to run in several socialnetworks which are also clouds of sorts

But standards go only so far Some fearthat one company could try to monopoliseother key parts of the cloud ironically Mishycrosoft worries that Google is doing exactshyly that with the online advertising marketTo Steve Ballmer Microsoftrsquos boss Gooshyglersquos advertising platform is like a ywheelthat picks up speed as more websites atshytract more advertisers and vice versa

Eric Schmidt Googlersquos chief executivedenies any evil intent to achieve worlddomination He argues with some justicethat it would be hard for Google to controlthe cloud if only for technical reasonsmuch of it is already based on open stanshy

dards and its loose structure does not lenditself to locking customers in

Mr Schmidt promises that Google willnot lock its users in either Our competishytive advantage is not from lockshyin he saysbut from having specialised knowledgeof how to build data centres and how tobuild new software that is not reproducshyible such as our search algorithm This ishow we make our money

Yet Google is more like Microsoft than itlikes to admit says Nicholas Carr a techshynology writer and blogger Microsoft heargues achieved its dominant position inthe PC world not least by commoditising

products such as the browser that arecomplementary to its cash cows such asWindows as their cost came down deshymand for Microsoftrsquos products went up

Similarly Googlersquos natural instinct is todo its utmost to encourage people to spendmore time online because that will givethe company more opportunities to selladvertisements and collect data aboutthem According to Mr Carr almost everyshything the company doesbuilding hugedata centres ghting copyright restrictionsdigitising the worldrsquos libraries developinga new browser and most recently evenhelping to launch satellitesis aimed at inshycreasing the use of the internet Googlewants information to be free he recentlywrote in his blog because as the cost of inshyformation falls it makes more money

But Google may never become as powshyerful as Microsoft because regulators areunlikely to let it Microsoft was eventuallyput in the dock for abusing its monopolybecause it got too greedy pushing most ofthe rest of the industry to complain Giventhat the world has already lived throughthe Microsoft drama and that Google willaect many more industries the searchcompany is likely to be restrained muchearlier The rm is currently in negotiationswith the US Justice Department about acontroversial advertising partnership beshytween itself and one of its competitors Yashyhoo which would further strengthenGooglersquos position in online advertising

Even if the economics of the cloud arestill in ux though it is already clear that itwill have farshyreaching implications forbusinesses and for society as a whole 7

12 A special report on corporate IT The Economist October 25th 2008

2

1

ing SAP the market leader in ERP is likepouring concrete into your company goesan old joke among IT types

This helps to explain why in manyrms IT departments and business unitshave traditionally been at loggerheads Inrecent years tensions have worsenedCompanies must grapple with evershychangshying markets and regulations yet IT budgetsare being cut Many rms now have a hugebacklog of IT projects

Hence the interest in cloud computingIt turns capital expenditure into operationshyal expenditure which makes things mucheasier and cheaper Instead of having toshell out a lot of money for say a server totest an application and even with luckwait a few weeks for it to be up and runshyning managers just have to whip out acredit card open an account at AmazonWeb Services (AWS) and re up a virtualmachine for a few dollars

In many rms senior managers probashybly do not even know that business unitsare using AWS or similar services In someorganisations however it has already beshycome a muchshyappreciated RampD tool Pharshymaceutical companies for instance areregularly tapping into AWS to calculatesimulations Sogeti a European consultanshycy has used a cloud built by IBM to allow itto test new ideas and quickly put togetheran IT system for a companyshywide brainshystorming event

Cloud services have also been hugelysuccessful with startshyups which can nowenjoy infrastructure of the same quality aslarge companies In fact AWS is probablythe main reason why there are now somany rms oering all kinds of Web 20services Their usefulness may sometimesbe hard to gauge but that is a good thing Itis a sign of lively combinatorial innovashytion made possible because entrepreshyneurs can cheaply try new combinationsof technology says Googlersquos Mr Varian

Many startshyups would probably noteven exist without the cloud Take Anishymoto a service that lets users turn photosinto artsy music videos using articial inshytelligence When it launched on Facebooka social network demand was such that ithad to increase the number of its virtualmachines on AWS from 50 to 3500 withinthree days You could give me unlimitedfunding says Adam Selipsky of AWSand I wouldnrsquot know how to deploy thatmany servers in 72 hours

Combinatorial innovation should alsobe made easier by the fact that the cloudwill be a huge collection of electronic sershyvices based on standards But this serviceshy

oriented architecture will be even moreimportant for existing rms because itshould free their inner workingstheirbusiness processesfrom the straitjacketof their ERP systems and allow these proshycesses to be more easily adapted for inshystance to launch a new product

Again the software industry has beenpromising this for some years under thebanner of serviceshyoriented architecturediscussed in an earlier chapter Yet theadoption of SOA has been slow and manyprojects have failed says Chris Howard ofthe Burton Group a consultancy The reashysons are not just technical but cultural forexample some business units are not usedto sharing data Cloud computing will helpresolve some of these problems Manywebshybased services are built to be integratshyed into existing business processes

Donrsquot do it yourselfWhat eect will all this have on the natureof the rm If IT systems really allow comshypanies to become more modular and exshyible this should foster further specialisashytion It will become even easier tooutsource business processes or at leastthose parts of them where rms do not enshyjoy a competitive advantage Companieswill increasingly focus on their core andshed the context in the words of Geofshyfrey Moore managing director of TCG Adshy

visors a consultancyThis also means that companies will

rely more on services provided by othersThey will increasingly form process netshyworks a term for loosely connectedgroupings of specialised rms coined byJohn Hagel a business strategist at Deloitteamp Touche an auditing rm His prime exshyample is Li amp Fung a company based inHong Kong that has assembled a globalprocess network of nearly 10000 businesspartners in the clothing industry fromwhich it puts together customised supplychains for clothes designers

Both trends could mean that in futurehuge cloudswhich might be called inshydustry operating systemswill providebasic services for a particular sector for inshystance nance or logistics On top of thesesystems will sit many specialised and inshyterconnected rms just like applicationson a computing platform Yet this is onlyhalf the story The cloud changes not onlythe plumbing and structure of rms andindustries known as the transactionallayer but also their interactional layera term coined by Andy Mulholland chieftechnologist of Capgemini a consultancyHe denes this as the environment whereall the interactions between people takeplace both within an organisation andwith its business partners

Despite all the technology that has enshy

The Economist October 25th 2008 A special report on corporate IT 13

2

1

READERS may be excused if they havenever heard of Kinakuta It is a tiny isshy

land dreamed up by Neal Stephenson inhis novel Cryptonomicon In the scishyenceshyction classic libertarian technoloshygists and entrepreneurs try to turn it into adata haven for such things as anonymousonline banking and electronic money

Reality has indeed caught up with fanshytasy Iceland is about to become a Kinakuta

of sorts Data Islandia a local company istrying to establish the island as a vault for agrowing pile of data that rms must retainin order to comply with all kinds of regulashytions It has a compelling pitch With itscool climate abundant geothermal energyand secure remoteness Iceland appears tobe a prime location for data archives

As often however truth is strangerthan ction In a way Data Islandia is erectshy

ing borders in the cloud it intends to storeEuropean data according to European regshyulation and American bits according toAmerican rules What is more to keep thedata safe during transport they are pickedup with a data scooter (in essence a conshytainer lled with disk drives) and taken toIceland by aeroplaneas though breshyopshytic links had never been invented

This illustrates the political tensions

Computers without borders

The cloud may be the ultimate form of globalisation

tered the workplace in recent years so farthis layer has not really changed PCs cershytainly made people more productive butmost of their programs were not designedfor collaboration The enterprise applicashytions they worked with were still centralshyised systems And eshymail has in some waysmade things worse as the ood of messhysages takes up lots of time and attention

The dominant model is still that peoplerst labour individually and then mergetheir respective eorts says Mr Mulholshyland Itrsquos not much dierent from the ageof paper he writes in his book Mesh Colshylaboration Collaboration often meanspulling up your chair next to your colshyleague so you can look at the same screen

Consumers have pulled ahead of comshypanies in using cloudshybased services thatallow for better collaboration such asblogs wikis and social networks The rstgeneration of people that has grown up usshying all these tools is now entering theworkforce Being used to a culture of sharshying information freely these digital nashytives will be impatient with the rules oftraditional corporate IT

So it is helpful that rms have at last beshygun to embrace Web 20 technologies inearnest a trend predictably called Entershyprise 20 By 2013 companies around theglobe will spend $46 billion on such toolsaccording to Forrester Research What noshybody knows is how rms will trade o theadvantages of letting employees collaboshyrate with the outside world against the asshysociated risks for instance that condenshytial information is leaked Because of suchsecurity concerns (see chart 8) many rmsblock access to such sites as Facebook oncompany computers

Companies may not have much choicebut to open up says Mr Mulholland Emshy

ployees will increasingly resist constraintson their use of technology and they willhave a growing need to reach beyond thecorporate rewall Twenty years ago he arshygues 80 of the knowledge that workersrequired to do their jobs resided withintheir company Now it is only 20 becausethe world is changing ever faster We needto be open to new and unknown connecshytions with people and content he says

Exploiting the mesh in the words ofMr Mulholland will also mean that emshyployees may build simple applications oftheir own that allow them quickly to autoshymate repeat tasks using internal and extershynal IT services A new product by SerenaSoftware called Mashup Composer gives aforetaste of things to come Using a visualinterface even the not so technically mindshyed can quickly put together a service todeal say with travel requests or approvedocuments

Yet the impact of the cloud will also befelt on a macroeconomic level Just as itmakes small rms more competitive itwill help developing economies to move

ahead The biggest promise is that it willmake computing cheaper and easier touseand thus allow it to penetrate newmarkets says Russ Daniels chief technolshyogy ocer for HPrsquos cloudshyservices strategy

Hop skip and jumpThe mobile phone has already enabled deshyveloping countries to skip xedshyline netshyworks Cloud computing could prove to bea similar leapfrog technology because itdispenses with the need to build a cumbershysome IT infrastructure Software developshyers from a developing country can buildjust as great an application on our platformas somebody who lives in Palo Alto saysMr Benio of Salesforce

Indeed countries such as India will cershytainly take a big chunk of the global marketfor cloud services Zoho a popular suite ofwebshybased applications is operated by anIndian company AdventNet Indian hospishytals are already oering specialised healthshycare services this way The insurance armof ICICI an Indian bank has used thetechnology to come up with innovativeservices such as a personalised insurancefor diabetes Premiums are adjusted deshypending on how well policyholders stickto a tness plan All this suggests that theeconomic impact of the cloud may be feltnot only in the IT industry itself but in othshyer sectors too The internet disrupted themusic business Google disrupted the meshydia cloudshybased companies could becomedisrupters in other inecient industriesBuzzwords such as Health Care 20Banking 20 or even Education 20could soon acquire real meaning

But given that the cloud is global by nashyture how might it be regulated The conshyclusion of this special report will oersome answers 7

8Dangers within

Source Forrester

Research

How IT organisations feel about risk ofemployee-driven unsanctioned use of Web 20June 2008

Survey of 242 US IT decision-makers

at companies with 500+ employees

0 10 20 30 40 50

Very concerned

Somewhat concerned

Somewhat unconcerned

Completely unconcerned

14 A special report on corporate IT The Economist October 25th 2008

2

Previous special reports and a list offorthcoming ones can be found online

wwweconomistcomspecialreports

Future special reportsCountries and regionsSpain November 8thRussia November 29thIndia December 13th

Business nance economics and ideasCars in the developing world November 15th The sea January 3rd 2009The future of nance Jan 31st 2009

wwweconomistcomrights

Oer to readersReprints of this special report are available at aprice of pound350 plus postage and packing A minimum order of ve copies is required

Corporate oerCustomisation options on corporate orders of 100or more are available Please contact us to discussyour requirements

Send all orders to

The Rights and Syndication Department26 Red Lion SquareLondon WC1R 4HQ

Tel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492eshymail rightseconomistcom

For more information and to order special reportsand reprints online please visit our website

that will arise with the cloud In one way itis the ultimate form of globalisation vastvirtualised computer systems and elecshytronic services know no borders Yet govshyernments are likely to go to great lengths toavoid losing even more control

When the internet went mainstream inthe late 1990s libertarian thinkers arguedthat cyberspace was a distinct place callingfor laws and legal institutions of its ownAfter all they said it was built in such away that it interprets censorship as damshyage and routes around it But many govshyernments quickly found ways to blockcontent they deemed oensive Just look atChina and its great rewall

Controlling where data are stored andhow they are treated is harder though beshycause information can oat freely in thecloud And it is not just undemocratic govshyernments that want to control their citishyzensrsquo and companiesrsquo data indeed thereare nearly as many sets of data regulationas there are countries If we wanted to beon the safe side in terms of regulation weprobably would need 95 individual datacentres says Chuck Hollis a technologistat EMC the leading maker of storage gearwhich owns Mozy a cloud service that alshylows users to back up their data

There are technological xes to this proshyblem too Customers of Amazonrsquos storageservice for instance can have their datakept either in an American or a Europeandata centre In future cloud providers willoer many more options for where dataare kept and how they are protected Itseems possible that data as well as content

will eventually travel with security locashytion and expiry policies attached

It is when computers become virtualmachines that things get really trickyThese days IT systems are at the core ofmany companiesand just like data thesesystems can now live in a variety of placesWhat happens if they start to migrate toanother country where power is cheaperor regulation laxer Similarly if servicesare a combination of elements provided indierent jurisdictions who is liable ifsomething goes wrong

The cloudrsquos potential political and soshycial eect is only now entering the publicdebate IT rms are putting it on the agendaon both sides of the Atlantic In midshySepshytember for instance Google organised adiscussion on the subject in WashingtonDC A few days later SAP presented a whitepaper in Brussels pointing out that policyshymakers are not aware of the dramatic ecoshynomic impact of the Future Internet asthe paper calls the cloud

IT industry leaders note that ocialsfrom many countries have begun to takean interest in the cloud Some just wantdata centres to be built in their country tocreate jobs others are concerned about isshysues of law enforcement and jurisdictionThe danger they say is that cloud providshyers might be obliged to build more datacentres than are needed and have to comshyply with many dierent regulatory reshygimes Some of them have been oatingthe idea of freeshytrade zones for data censhytres where common rules would apply

Yet such ideas appear at odds with anshyother big question that could keep thecloud from growing how to protect prishyvacy Consumers expect their informashy

tion will be treated the same way on thecloud as if it were stored at home on theirown computers says Ari Schwartz of theCenter for Democracy and Technology anadvocacy group Many of the devices thatfeed into it such as sensors and cameraswill be intrusive For example Googlersquosvans go round taking streetshybyshystreet picshytures of cities for the companyrsquos onlinemap service called Streetview The picshytures are meant to help people nd theirway around but also often show passshyersshyby in embarrassing situations To proshytect their identity Google now blurs theirfaces and licence plates

Hands o my dataBut it is not only personal information thatcould get out into the open Privacy is aworry for companies tooand not just beshycause criminals or spies might intercepttheir data Once they are in the cloud govshyernments can also get their hands on themmore easily SWIFT the organisation thatmanages international bank transfers isplanning to build a data centre in neutralSwitzerland That will allow it to keep dataabout European transfers on the old contishynent where it cannot be subpoenaed bythe American government Webshybased eshymail is not safe either Thanks to the StoredCommunications Act American law enshyforcers can read peoplersquos messagesanddo not even have to tell the recipient

Just as too much regulation may keepthe cloud from rising high so could lack ofprivacy If consumers and companies canshynot be sure that their information is safethey will err on the side of caution But deshyspite all the caveats the precipitation fromthe cloud will be huge 7

The Economist October 25th 2008 A special report on corporate IT 11

2

1

BUSINESSES as well as most organishysations outside the business world

begin to shift from hierarchical processesto networked ones Nearly every facet ofhuman activity is transformed in someway by the emergent fabric of interconnecshytion This reorganisation leads to dramaticimprovements in eciency and producshytivity So said Wired magazine the centralorgan of Web 10 in July 1997 in an essay enshytitled The Long Boom arguing that theworld was in for 25 years of prosperityfreedom and a better environment Backthen the article reected the general optishy

mism that led up to the internet bubbleNow after two busts several wars andgrowing fears of global warming it makesfor somewhat surreal reading

The cloud lends itself to similar hypershybole Yet so far there has not been much deshybate about its economic falloutprobablybecause the new economy ended badlyand the newest one is currently doing evenworse There will be many ways in whichthe cloud will change businesses and theeconomy most of them hard to predict butone theme is already emerging Businessesare becoming more like the technology itshy

self more adaptable more interwovenand more specialised These developshyments may not be new but cloud computshying will speed them up

Corporate IT has always promised tomake companies more agile In the 1990smany companies reshyengineered their busishyness processes when they started using aform of software called enterpriseshyreshysource planning (ERP) which does thingssuch as managing a rmrsquos nances andemployees But once these massive softshyware packages were in place it was exceedshyingly dicult to change them Implementshy

The long nimbus

The cloud will make businesses more adaptable interconnected and specialisedand often smaller

tres the computing needs of companiesand consumers vary too widely for onesize to t all

Even if the cloud is likely to transformthe IT industry some things will stay thesame One is the importance of lockshyin Ifanything companies and developers willbe even more dependent on cloud platshyforms and applications than they are onthe old kind SaaS promotes the hollowshying out of IT a rm that needs to migrateto another system will no longer have therequired expertise When Facebook saymakes a change to its platform developershave no choice but to go along with itSome are already calling for a CloudComputing Consortium in the mould ofthe World Wide Web Consortium (W3C)to set standards that allow applications tomigrate easily from one platform to anothshyer One standard initiative called OpenshySocial already allows the same webshybased application to run in several socialnetworks which are also clouds of sorts

But standards go only so far Some fearthat one company could try to monopoliseother key parts of the cloud ironically Mishycrosoft worries that Google is doing exactshyly that with the online advertising marketTo Steve Ballmer Microsoftrsquos boss Gooshyglersquos advertising platform is like a ywheelthat picks up speed as more websites atshytract more advertisers and vice versa

Eric Schmidt Googlersquos chief executivedenies any evil intent to achieve worlddomination He argues with some justicethat it would be hard for Google to controlthe cloud if only for technical reasonsmuch of it is already based on open stanshy

dards and its loose structure does not lenditself to locking customers in

Mr Schmidt promises that Google willnot lock its users in either Our competishytive advantage is not from lockshyin he saysbut from having specialised knowledgeof how to build data centres and how tobuild new software that is not reproducshyible such as our search algorithm This ishow we make our money

Yet Google is more like Microsoft than itlikes to admit says Nicholas Carr a techshynology writer and blogger Microsoft heargues achieved its dominant position inthe PC world not least by commoditising

products such as the browser that arecomplementary to its cash cows such asWindows as their cost came down deshymand for Microsoftrsquos products went up

Similarly Googlersquos natural instinct is todo its utmost to encourage people to spendmore time online because that will givethe company more opportunities to selladvertisements and collect data aboutthem According to Mr Carr almost everyshything the company doesbuilding hugedata centres ghting copyright restrictionsdigitising the worldrsquos libraries developinga new browser and most recently evenhelping to launch satellitesis aimed at inshycreasing the use of the internet Googlewants information to be free he recentlywrote in his blog because as the cost of inshyformation falls it makes more money

But Google may never become as powshyerful as Microsoft because regulators areunlikely to let it Microsoft was eventuallyput in the dock for abusing its monopolybecause it got too greedy pushing most ofthe rest of the industry to complain Giventhat the world has already lived throughthe Microsoft drama and that Google willaect many more industries the searchcompany is likely to be restrained muchearlier The rm is currently in negotiationswith the US Justice Department about acontroversial advertising partnership beshytween itself and one of its competitors Yashyhoo which would further strengthenGooglersquos position in online advertising

Even if the economics of the cloud arestill in ux though it is already clear that itwill have farshyreaching implications forbusinesses and for society as a whole 7

12 A special report on corporate IT The Economist October 25th 2008

2

1

ing SAP the market leader in ERP is likepouring concrete into your company goesan old joke among IT types

This helps to explain why in manyrms IT departments and business unitshave traditionally been at loggerheads Inrecent years tensions have worsenedCompanies must grapple with evershychangshying markets and regulations yet IT budgetsare being cut Many rms now have a hugebacklog of IT projects

Hence the interest in cloud computingIt turns capital expenditure into operationshyal expenditure which makes things mucheasier and cheaper Instead of having toshell out a lot of money for say a server totest an application and even with luckwait a few weeks for it to be up and runshyning managers just have to whip out acredit card open an account at AmazonWeb Services (AWS) and re up a virtualmachine for a few dollars

In many rms senior managers probashybly do not even know that business unitsare using AWS or similar services In someorganisations however it has already beshycome a muchshyappreciated RampD tool Pharshymaceutical companies for instance areregularly tapping into AWS to calculatesimulations Sogeti a European consultanshycy has used a cloud built by IBM to allow itto test new ideas and quickly put togetheran IT system for a companyshywide brainshystorming event

Cloud services have also been hugelysuccessful with startshyups which can nowenjoy infrastructure of the same quality aslarge companies In fact AWS is probablythe main reason why there are now somany rms oering all kinds of Web 20services Their usefulness may sometimesbe hard to gauge but that is a good thing Itis a sign of lively combinatorial innovashytion made possible because entrepreshyneurs can cheaply try new combinationsof technology says Googlersquos Mr Varian

Many startshyups would probably noteven exist without the cloud Take Anishymoto a service that lets users turn photosinto artsy music videos using articial inshytelligence When it launched on Facebooka social network demand was such that ithad to increase the number of its virtualmachines on AWS from 50 to 3500 withinthree days You could give me unlimitedfunding says Adam Selipsky of AWSand I wouldnrsquot know how to deploy thatmany servers in 72 hours

Combinatorial innovation should alsobe made easier by the fact that the cloudwill be a huge collection of electronic sershyvices based on standards But this serviceshy

oriented architecture will be even moreimportant for existing rms because itshould free their inner workingstheirbusiness processesfrom the straitjacketof their ERP systems and allow these proshycesses to be more easily adapted for inshystance to launch a new product

Again the software industry has beenpromising this for some years under thebanner of serviceshyoriented architecturediscussed in an earlier chapter Yet theadoption of SOA has been slow and manyprojects have failed says Chris Howard ofthe Burton Group a consultancy The reashysons are not just technical but cultural forexample some business units are not usedto sharing data Cloud computing will helpresolve some of these problems Manywebshybased services are built to be integratshyed into existing business processes

Donrsquot do it yourselfWhat eect will all this have on the natureof the rm If IT systems really allow comshypanies to become more modular and exshyible this should foster further specialisashytion It will become even easier tooutsource business processes or at leastthose parts of them where rms do not enshyjoy a competitive advantage Companieswill increasingly focus on their core andshed the context in the words of Geofshyfrey Moore managing director of TCG Adshy

visors a consultancyThis also means that companies will

rely more on services provided by othersThey will increasingly form process netshyworks a term for loosely connectedgroupings of specialised rms coined byJohn Hagel a business strategist at Deloitteamp Touche an auditing rm His prime exshyample is Li amp Fung a company based inHong Kong that has assembled a globalprocess network of nearly 10000 businesspartners in the clothing industry fromwhich it puts together customised supplychains for clothes designers

Both trends could mean that in futurehuge cloudswhich might be called inshydustry operating systemswill providebasic services for a particular sector for inshystance nance or logistics On top of thesesystems will sit many specialised and inshyterconnected rms just like applicationson a computing platform Yet this is onlyhalf the story The cloud changes not onlythe plumbing and structure of rms andindustries known as the transactionallayer but also their interactional layera term coined by Andy Mulholland chieftechnologist of Capgemini a consultancyHe denes this as the environment whereall the interactions between people takeplace both within an organisation andwith its business partners

Despite all the technology that has enshy

The Economist October 25th 2008 A special report on corporate IT 13

2

1

READERS may be excused if they havenever heard of Kinakuta It is a tiny isshy

land dreamed up by Neal Stephenson inhis novel Cryptonomicon In the scishyenceshyction classic libertarian technoloshygists and entrepreneurs try to turn it into adata haven for such things as anonymousonline banking and electronic money

Reality has indeed caught up with fanshytasy Iceland is about to become a Kinakuta

of sorts Data Islandia a local company istrying to establish the island as a vault for agrowing pile of data that rms must retainin order to comply with all kinds of regulashytions It has a compelling pitch With itscool climate abundant geothermal energyand secure remoteness Iceland appears tobe a prime location for data archives

As often however truth is strangerthan ction In a way Data Islandia is erectshy

ing borders in the cloud it intends to storeEuropean data according to European regshyulation and American bits according toAmerican rules What is more to keep thedata safe during transport they are pickedup with a data scooter (in essence a conshytainer lled with disk drives) and taken toIceland by aeroplaneas though breshyopshytic links had never been invented

This illustrates the political tensions

Computers without borders

The cloud may be the ultimate form of globalisation

tered the workplace in recent years so farthis layer has not really changed PCs cershytainly made people more productive butmost of their programs were not designedfor collaboration The enterprise applicashytions they worked with were still centralshyised systems And eshymail has in some waysmade things worse as the ood of messhysages takes up lots of time and attention

The dominant model is still that peoplerst labour individually and then mergetheir respective eorts says Mr Mulholshyland Itrsquos not much dierent from the ageof paper he writes in his book Mesh Colshylaboration Collaboration often meanspulling up your chair next to your colshyleague so you can look at the same screen

Consumers have pulled ahead of comshypanies in using cloudshybased services thatallow for better collaboration such asblogs wikis and social networks The rstgeneration of people that has grown up usshying all these tools is now entering theworkforce Being used to a culture of sharshying information freely these digital nashytives will be impatient with the rules oftraditional corporate IT

So it is helpful that rms have at last beshygun to embrace Web 20 technologies inearnest a trend predictably called Entershyprise 20 By 2013 companies around theglobe will spend $46 billion on such toolsaccording to Forrester Research What noshybody knows is how rms will trade o theadvantages of letting employees collaboshyrate with the outside world against the asshysociated risks for instance that condenshytial information is leaked Because of suchsecurity concerns (see chart 8) many rmsblock access to such sites as Facebook oncompany computers

Companies may not have much choicebut to open up says Mr Mulholland Emshy

ployees will increasingly resist constraintson their use of technology and they willhave a growing need to reach beyond thecorporate rewall Twenty years ago he arshygues 80 of the knowledge that workersrequired to do their jobs resided withintheir company Now it is only 20 becausethe world is changing ever faster We needto be open to new and unknown connecshytions with people and content he says

Exploiting the mesh in the words ofMr Mulholland will also mean that emshyployees may build simple applications oftheir own that allow them quickly to autoshymate repeat tasks using internal and extershynal IT services A new product by SerenaSoftware called Mashup Composer gives aforetaste of things to come Using a visualinterface even the not so technically mindshyed can quickly put together a service todeal say with travel requests or approvedocuments

Yet the impact of the cloud will also befelt on a macroeconomic level Just as itmakes small rms more competitive itwill help developing economies to move

ahead The biggest promise is that it willmake computing cheaper and easier touseand thus allow it to penetrate newmarkets says Russ Daniels chief technolshyogy ocer for HPrsquos cloudshyservices strategy

Hop skip and jumpThe mobile phone has already enabled deshyveloping countries to skip xedshyline netshyworks Cloud computing could prove to bea similar leapfrog technology because itdispenses with the need to build a cumbershysome IT infrastructure Software developshyers from a developing country can buildjust as great an application on our platformas somebody who lives in Palo Alto saysMr Benio of Salesforce

Indeed countries such as India will cershytainly take a big chunk of the global marketfor cloud services Zoho a popular suite ofwebshybased applications is operated by anIndian company AdventNet Indian hospishytals are already oering specialised healthshycare services this way The insurance armof ICICI an Indian bank has used thetechnology to come up with innovativeservices such as a personalised insurancefor diabetes Premiums are adjusted deshypending on how well policyholders stickto a tness plan All this suggests that theeconomic impact of the cloud may be feltnot only in the IT industry itself but in othshyer sectors too The internet disrupted themusic business Google disrupted the meshydia cloudshybased companies could becomedisrupters in other inecient industriesBuzzwords such as Health Care 20Banking 20 or even Education 20could soon acquire real meaning

But given that the cloud is global by nashyture how might it be regulated The conshyclusion of this special report will oersome answers 7

8Dangers within

Source Forrester

Research

How IT organisations feel about risk ofemployee-driven unsanctioned use of Web 20June 2008

Survey of 242 US IT decision-makers

at companies with 500+ employees

0 10 20 30 40 50

Very concerned

Somewhat concerned

Somewhat unconcerned

Completely unconcerned

14 A special report on corporate IT The Economist October 25th 2008

2

Previous special reports and a list offorthcoming ones can be found online

wwweconomistcomspecialreports

Future special reportsCountries and regionsSpain November 8thRussia November 29thIndia December 13th

Business nance economics and ideasCars in the developing world November 15th The sea January 3rd 2009The future of nance Jan 31st 2009

wwweconomistcomrights

Oer to readersReprints of this special report are available at aprice of pound350 plus postage and packing A minimum order of ve copies is required

Corporate oerCustomisation options on corporate orders of 100or more are available Please contact us to discussyour requirements

Send all orders to

The Rights and Syndication Department26 Red Lion SquareLondon WC1R 4HQ

Tel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492eshymail rightseconomistcom

For more information and to order special reportsand reprints online please visit our website

that will arise with the cloud In one way itis the ultimate form of globalisation vastvirtualised computer systems and elecshytronic services know no borders Yet govshyernments are likely to go to great lengths toavoid losing even more control

When the internet went mainstream inthe late 1990s libertarian thinkers arguedthat cyberspace was a distinct place callingfor laws and legal institutions of its ownAfter all they said it was built in such away that it interprets censorship as damshyage and routes around it But many govshyernments quickly found ways to blockcontent they deemed oensive Just look atChina and its great rewall

Controlling where data are stored andhow they are treated is harder though beshycause information can oat freely in thecloud And it is not just undemocratic govshyernments that want to control their citishyzensrsquo and companiesrsquo data indeed thereare nearly as many sets of data regulationas there are countries If we wanted to beon the safe side in terms of regulation weprobably would need 95 individual datacentres says Chuck Hollis a technologistat EMC the leading maker of storage gearwhich owns Mozy a cloud service that alshylows users to back up their data

There are technological xes to this proshyblem too Customers of Amazonrsquos storageservice for instance can have their datakept either in an American or a Europeandata centre In future cloud providers willoer many more options for where dataare kept and how they are protected Itseems possible that data as well as content

will eventually travel with security locashytion and expiry policies attached

It is when computers become virtualmachines that things get really trickyThese days IT systems are at the core ofmany companiesand just like data thesesystems can now live in a variety of placesWhat happens if they start to migrate toanother country where power is cheaperor regulation laxer Similarly if servicesare a combination of elements provided indierent jurisdictions who is liable ifsomething goes wrong

The cloudrsquos potential political and soshycial eect is only now entering the publicdebate IT rms are putting it on the agendaon both sides of the Atlantic In midshySepshytember for instance Google organised adiscussion on the subject in WashingtonDC A few days later SAP presented a whitepaper in Brussels pointing out that policyshymakers are not aware of the dramatic ecoshynomic impact of the Future Internet asthe paper calls the cloud

IT industry leaders note that ocialsfrom many countries have begun to takean interest in the cloud Some just wantdata centres to be built in their country tocreate jobs others are concerned about isshysues of law enforcement and jurisdictionThe danger they say is that cloud providshyers might be obliged to build more datacentres than are needed and have to comshyply with many dierent regulatory reshygimes Some of them have been oatingthe idea of freeshytrade zones for data censhytres where common rules would apply

Yet such ideas appear at odds with anshyother big question that could keep thecloud from growing how to protect prishyvacy Consumers expect their informashy

tion will be treated the same way on thecloud as if it were stored at home on theirown computers says Ari Schwartz of theCenter for Democracy and Technology anadvocacy group Many of the devices thatfeed into it such as sensors and cameraswill be intrusive For example Googlersquosvans go round taking streetshybyshystreet picshytures of cities for the companyrsquos onlinemap service called Streetview The picshytures are meant to help people nd theirway around but also often show passshyersshyby in embarrassing situations To proshytect their identity Google now blurs theirfaces and licence plates

Hands o my dataBut it is not only personal information thatcould get out into the open Privacy is aworry for companies tooand not just beshycause criminals or spies might intercepttheir data Once they are in the cloud govshyernments can also get their hands on themmore easily SWIFT the organisation thatmanages international bank transfers isplanning to build a data centre in neutralSwitzerland That will allow it to keep dataabout European transfers on the old contishynent where it cannot be subpoenaed bythe American government Webshybased eshymail is not safe either Thanks to the StoredCommunications Act American law enshyforcers can read peoplersquos messagesanddo not even have to tell the recipient

Just as too much regulation may keepthe cloud from rising high so could lack ofprivacy If consumers and companies canshynot be sure that their information is safethey will err on the side of caution But deshyspite all the caveats the precipitation fromthe cloud will be huge 7

12 A special report on corporate IT The Economist October 25th 2008

2

1

ing SAP the market leader in ERP is likepouring concrete into your company goesan old joke among IT types

This helps to explain why in manyrms IT departments and business unitshave traditionally been at loggerheads Inrecent years tensions have worsenedCompanies must grapple with evershychangshying markets and regulations yet IT budgetsare being cut Many rms now have a hugebacklog of IT projects

Hence the interest in cloud computingIt turns capital expenditure into operationshyal expenditure which makes things mucheasier and cheaper Instead of having toshell out a lot of money for say a server totest an application and even with luckwait a few weeks for it to be up and runshyning managers just have to whip out acredit card open an account at AmazonWeb Services (AWS) and re up a virtualmachine for a few dollars

In many rms senior managers probashybly do not even know that business unitsare using AWS or similar services In someorganisations however it has already beshycome a muchshyappreciated RampD tool Pharshymaceutical companies for instance areregularly tapping into AWS to calculatesimulations Sogeti a European consultanshycy has used a cloud built by IBM to allow itto test new ideas and quickly put togetheran IT system for a companyshywide brainshystorming event

Cloud services have also been hugelysuccessful with startshyups which can nowenjoy infrastructure of the same quality aslarge companies In fact AWS is probablythe main reason why there are now somany rms oering all kinds of Web 20services Their usefulness may sometimesbe hard to gauge but that is a good thing Itis a sign of lively combinatorial innovashytion made possible because entrepreshyneurs can cheaply try new combinationsof technology says Googlersquos Mr Varian

Many startshyups would probably noteven exist without the cloud Take Anishymoto a service that lets users turn photosinto artsy music videos using articial inshytelligence When it launched on Facebooka social network demand was such that ithad to increase the number of its virtualmachines on AWS from 50 to 3500 withinthree days You could give me unlimitedfunding says Adam Selipsky of AWSand I wouldnrsquot know how to deploy thatmany servers in 72 hours

Combinatorial innovation should alsobe made easier by the fact that the cloudwill be a huge collection of electronic sershyvices based on standards But this serviceshy

oriented architecture will be even moreimportant for existing rms because itshould free their inner workingstheirbusiness processesfrom the straitjacketof their ERP systems and allow these proshycesses to be more easily adapted for inshystance to launch a new product

Again the software industry has beenpromising this for some years under thebanner of serviceshyoriented architecturediscussed in an earlier chapter Yet theadoption of SOA has been slow and manyprojects have failed says Chris Howard ofthe Burton Group a consultancy The reashysons are not just technical but cultural forexample some business units are not usedto sharing data Cloud computing will helpresolve some of these problems Manywebshybased services are built to be integratshyed into existing business processes

Donrsquot do it yourselfWhat eect will all this have on the natureof the rm If IT systems really allow comshypanies to become more modular and exshyible this should foster further specialisashytion It will become even easier tooutsource business processes or at leastthose parts of them where rms do not enshyjoy a competitive advantage Companieswill increasingly focus on their core andshed the context in the words of Geofshyfrey Moore managing director of TCG Adshy

visors a consultancyThis also means that companies will

rely more on services provided by othersThey will increasingly form process netshyworks a term for loosely connectedgroupings of specialised rms coined byJohn Hagel a business strategist at Deloitteamp Touche an auditing rm His prime exshyample is Li amp Fung a company based inHong Kong that has assembled a globalprocess network of nearly 10000 businesspartners in the clothing industry fromwhich it puts together customised supplychains for clothes designers

Both trends could mean that in futurehuge cloudswhich might be called inshydustry operating systemswill providebasic services for a particular sector for inshystance nance or logistics On top of thesesystems will sit many specialised and inshyterconnected rms just like applicationson a computing platform Yet this is onlyhalf the story The cloud changes not onlythe plumbing and structure of rms andindustries known as the transactionallayer but also their interactional layera term coined by Andy Mulholland chieftechnologist of Capgemini a consultancyHe denes this as the environment whereall the interactions between people takeplace both within an organisation andwith its business partners

Despite all the technology that has enshy

The Economist October 25th 2008 A special report on corporate IT 13

2

1

READERS may be excused if they havenever heard of Kinakuta It is a tiny isshy

land dreamed up by Neal Stephenson inhis novel Cryptonomicon In the scishyenceshyction classic libertarian technoloshygists and entrepreneurs try to turn it into adata haven for such things as anonymousonline banking and electronic money

Reality has indeed caught up with fanshytasy Iceland is about to become a Kinakuta

of sorts Data Islandia a local company istrying to establish the island as a vault for agrowing pile of data that rms must retainin order to comply with all kinds of regulashytions It has a compelling pitch With itscool climate abundant geothermal energyand secure remoteness Iceland appears tobe a prime location for data archives

As often however truth is strangerthan ction In a way Data Islandia is erectshy

ing borders in the cloud it intends to storeEuropean data according to European regshyulation and American bits according toAmerican rules What is more to keep thedata safe during transport they are pickedup with a data scooter (in essence a conshytainer lled with disk drives) and taken toIceland by aeroplaneas though breshyopshytic links had never been invented

This illustrates the political tensions

Computers without borders

The cloud may be the ultimate form of globalisation

tered the workplace in recent years so farthis layer has not really changed PCs cershytainly made people more productive butmost of their programs were not designedfor collaboration The enterprise applicashytions they worked with were still centralshyised systems And eshymail has in some waysmade things worse as the ood of messhysages takes up lots of time and attention

The dominant model is still that peoplerst labour individually and then mergetheir respective eorts says Mr Mulholshyland Itrsquos not much dierent from the ageof paper he writes in his book Mesh Colshylaboration Collaboration often meanspulling up your chair next to your colshyleague so you can look at the same screen

Consumers have pulled ahead of comshypanies in using cloudshybased services thatallow for better collaboration such asblogs wikis and social networks The rstgeneration of people that has grown up usshying all these tools is now entering theworkforce Being used to a culture of sharshying information freely these digital nashytives will be impatient with the rules oftraditional corporate IT

So it is helpful that rms have at last beshygun to embrace Web 20 technologies inearnest a trend predictably called Entershyprise 20 By 2013 companies around theglobe will spend $46 billion on such toolsaccording to Forrester Research What noshybody knows is how rms will trade o theadvantages of letting employees collaboshyrate with the outside world against the asshysociated risks for instance that condenshytial information is leaked Because of suchsecurity concerns (see chart 8) many rmsblock access to such sites as Facebook oncompany computers

Companies may not have much choicebut to open up says Mr Mulholland Emshy

ployees will increasingly resist constraintson their use of technology and they willhave a growing need to reach beyond thecorporate rewall Twenty years ago he arshygues 80 of the knowledge that workersrequired to do their jobs resided withintheir company Now it is only 20 becausethe world is changing ever faster We needto be open to new and unknown connecshytions with people and content he says

Exploiting the mesh in the words ofMr Mulholland will also mean that emshyployees may build simple applications oftheir own that allow them quickly to autoshymate repeat tasks using internal and extershynal IT services A new product by SerenaSoftware called Mashup Composer gives aforetaste of things to come Using a visualinterface even the not so technically mindshyed can quickly put together a service todeal say with travel requests or approvedocuments

Yet the impact of the cloud will also befelt on a macroeconomic level Just as itmakes small rms more competitive itwill help developing economies to move

ahead The biggest promise is that it willmake computing cheaper and easier touseand thus allow it to penetrate newmarkets says Russ Daniels chief technolshyogy ocer for HPrsquos cloudshyservices strategy

Hop skip and jumpThe mobile phone has already enabled deshyveloping countries to skip xedshyline netshyworks Cloud computing could prove to bea similar leapfrog technology because itdispenses with the need to build a cumbershysome IT infrastructure Software developshyers from a developing country can buildjust as great an application on our platformas somebody who lives in Palo Alto saysMr Benio of Salesforce

Indeed countries such as India will cershytainly take a big chunk of the global marketfor cloud services Zoho a popular suite ofwebshybased applications is operated by anIndian company AdventNet Indian hospishytals are already oering specialised healthshycare services this way The insurance armof ICICI an Indian bank has used thetechnology to come up with innovativeservices such as a personalised insurancefor diabetes Premiums are adjusted deshypending on how well policyholders stickto a tness plan All this suggests that theeconomic impact of the cloud may be feltnot only in the IT industry itself but in othshyer sectors too The internet disrupted themusic business Google disrupted the meshydia cloudshybased companies could becomedisrupters in other inecient industriesBuzzwords such as Health Care 20Banking 20 or even Education 20could soon acquire real meaning

But given that the cloud is global by nashyture how might it be regulated The conshyclusion of this special report will oersome answers 7

8Dangers within

Source Forrester

Research

How IT organisations feel about risk ofemployee-driven unsanctioned use of Web 20June 2008

Survey of 242 US IT decision-makers

at companies with 500+ employees

0 10 20 30 40 50

Very concerned

Somewhat concerned

Somewhat unconcerned

Completely unconcerned

14 A special report on corporate IT The Economist October 25th 2008

2

Previous special reports and a list offorthcoming ones can be found online

wwweconomistcomspecialreports

Future special reportsCountries and regionsSpain November 8thRussia November 29thIndia December 13th

Business nance economics and ideasCars in the developing world November 15th The sea January 3rd 2009The future of nance Jan 31st 2009

wwweconomistcomrights

Oer to readersReprints of this special report are available at aprice of pound350 plus postage and packing A minimum order of ve copies is required

Corporate oerCustomisation options on corporate orders of 100or more are available Please contact us to discussyour requirements

Send all orders to

The Rights and Syndication Department26 Red Lion SquareLondon WC1R 4HQ

Tel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492eshymail rightseconomistcom

For more information and to order special reportsand reprints online please visit our website

that will arise with the cloud In one way itis the ultimate form of globalisation vastvirtualised computer systems and elecshytronic services know no borders Yet govshyernments are likely to go to great lengths toavoid losing even more control

When the internet went mainstream inthe late 1990s libertarian thinkers arguedthat cyberspace was a distinct place callingfor laws and legal institutions of its ownAfter all they said it was built in such away that it interprets censorship as damshyage and routes around it But many govshyernments quickly found ways to blockcontent they deemed oensive Just look atChina and its great rewall

Controlling where data are stored andhow they are treated is harder though beshycause information can oat freely in thecloud And it is not just undemocratic govshyernments that want to control their citishyzensrsquo and companiesrsquo data indeed thereare nearly as many sets of data regulationas there are countries If we wanted to beon the safe side in terms of regulation weprobably would need 95 individual datacentres says Chuck Hollis a technologistat EMC the leading maker of storage gearwhich owns Mozy a cloud service that alshylows users to back up their data

There are technological xes to this proshyblem too Customers of Amazonrsquos storageservice for instance can have their datakept either in an American or a Europeandata centre In future cloud providers willoer many more options for where dataare kept and how they are protected Itseems possible that data as well as content

will eventually travel with security locashytion and expiry policies attached

It is when computers become virtualmachines that things get really trickyThese days IT systems are at the core ofmany companiesand just like data thesesystems can now live in a variety of placesWhat happens if they start to migrate toanother country where power is cheaperor regulation laxer Similarly if servicesare a combination of elements provided indierent jurisdictions who is liable ifsomething goes wrong

The cloudrsquos potential political and soshycial eect is only now entering the publicdebate IT rms are putting it on the agendaon both sides of the Atlantic In midshySepshytember for instance Google organised adiscussion on the subject in WashingtonDC A few days later SAP presented a whitepaper in Brussels pointing out that policyshymakers are not aware of the dramatic ecoshynomic impact of the Future Internet asthe paper calls the cloud

IT industry leaders note that ocialsfrom many countries have begun to takean interest in the cloud Some just wantdata centres to be built in their country tocreate jobs others are concerned about isshysues of law enforcement and jurisdictionThe danger they say is that cloud providshyers might be obliged to build more datacentres than are needed and have to comshyply with many dierent regulatory reshygimes Some of them have been oatingthe idea of freeshytrade zones for data censhytres where common rules would apply

Yet such ideas appear at odds with anshyother big question that could keep thecloud from growing how to protect prishyvacy Consumers expect their informashy

tion will be treated the same way on thecloud as if it were stored at home on theirown computers says Ari Schwartz of theCenter for Democracy and Technology anadvocacy group Many of the devices thatfeed into it such as sensors and cameraswill be intrusive For example Googlersquosvans go round taking streetshybyshystreet picshytures of cities for the companyrsquos onlinemap service called Streetview The picshytures are meant to help people nd theirway around but also often show passshyersshyby in embarrassing situations To proshytect their identity Google now blurs theirfaces and licence plates

Hands o my dataBut it is not only personal information thatcould get out into the open Privacy is aworry for companies tooand not just beshycause criminals or spies might intercepttheir data Once they are in the cloud govshyernments can also get their hands on themmore easily SWIFT the organisation thatmanages international bank transfers isplanning to build a data centre in neutralSwitzerland That will allow it to keep dataabout European transfers on the old contishynent where it cannot be subpoenaed bythe American government Webshybased eshymail is not safe either Thanks to the StoredCommunications Act American law enshyforcers can read peoplersquos messagesanddo not even have to tell the recipient

Just as too much regulation may keepthe cloud from rising high so could lack ofprivacy If consumers and companies canshynot be sure that their information is safethey will err on the side of caution But deshyspite all the caveats the precipitation fromthe cloud will be huge 7

The Economist October 25th 2008 A special report on corporate IT 13

2

1

READERS may be excused if they havenever heard of Kinakuta It is a tiny isshy

land dreamed up by Neal Stephenson inhis novel Cryptonomicon In the scishyenceshyction classic libertarian technoloshygists and entrepreneurs try to turn it into adata haven for such things as anonymousonline banking and electronic money

Reality has indeed caught up with fanshytasy Iceland is about to become a Kinakuta

of sorts Data Islandia a local company istrying to establish the island as a vault for agrowing pile of data that rms must retainin order to comply with all kinds of regulashytions It has a compelling pitch With itscool climate abundant geothermal energyand secure remoteness Iceland appears tobe a prime location for data archives

As often however truth is strangerthan ction In a way Data Islandia is erectshy

ing borders in the cloud it intends to storeEuropean data according to European regshyulation and American bits according toAmerican rules What is more to keep thedata safe during transport they are pickedup with a data scooter (in essence a conshytainer lled with disk drives) and taken toIceland by aeroplaneas though breshyopshytic links had never been invented

This illustrates the political tensions

Computers without borders

The cloud may be the ultimate form of globalisation

tered the workplace in recent years so farthis layer has not really changed PCs cershytainly made people more productive butmost of their programs were not designedfor collaboration The enterprise applicashytions they worked with were still centralshyised systems And eshymail has in some waysmade things worse as the ood of messhysages takes up lots of time and attention

The dominant model is still that peoplerst labour individually and then mergetheir respective eorts says Mr Mulholshyland Itrsquos not much dierent from the ageof paper he writes in his book Mesh Colshylaboration Collaboration often meanspulling up your chair next to your colshyleague so you can look at the same screen

Consumers have pulled ahead of comshypanies in using cloudshybased services thatallow for better collaboration such asblogs wikis and social networks The rstgeneration of people that has grown up usshying all these tools is now entering theworkforce Being used to a culture of sharshying information freely these digital nashytives will be impatient with the rules oftraditional corporate IT

So it is helpful that rms have at last beshygun to embrace Web 20 technologies inearnest a trend predictably called Entershyprise 20 By 2013 companies around theglobe will spend $46 billion on such toolsaccording to Forrester Research What noshybody knows is how rms will trade o theadvantages of letting employees collaboshyrate with the outside world against the asshysociated risks for instance that condenshytial information is leaked Because of suchsecurity concerns (see chart 8) many rmsblock access to such sites as Facebook oncompany computers

Companies may not have much choicebut to open up says Mr Mulholland Emshy

ployees will increasingly resist constraintson their use of technology and they willhave a growing need to reach beyond thecorporate rewall Twenty years ago he arshygues 80 of the knowledge that workersrequired to do their jobs resided withintheir company Now it is only 20 becausethe world is changing ever faster We needto be open to new and unknown connecshytions with people and content he says

Exploiting the mesh in the words ofMr Mulholland will also mean that emshyployees may build simple applications oftheir own that allow them quickly to autoshymate repeat tasks using internal and extershynal IT services A new product by SerenaSoftware called Mashup Composer gives aforetaste of things to come Using a visualinterface even the not so technically mindshyed can quickly put together a service todeal say with travel requests or approvedocuments

Yet the impact of the cloud will also befelt on a macroeconomic level Just as itmakes small rms more competitive itwill help developing economies to move

ahead The biggest promise is that it willmake computing cheaper and easier touseand thus allow it to penetrate newmarkets says Russ Daniels chief technolshyogy ocer for HPrsquos cloudshyservices strategy

Hop skip and jumpThe mobile phone has already enabled deshyveloping countries to skip xedshyline netshyworks Cloud computing could prove to bea similar leapfrog technology because itdispenses with the need to build a cumbershysome IT infrastructure Software developshyers from a developing country can buildjust as great an application on our platformas somebody who lives in Palo Alto saysMr Benio of Salesforce

Indeed countries such as India will cershytainly take a big chunk of the global marketfor cloud services Zoho a popular suite ofwebshybased applications is operated by anIndian company AdventNet Indian hospishytals are already oering specialised healthshycare services this way The insurance armof ICICI an Indian bank has used thetechnology to come up with innovativeservices such as a personalised insurancefor diabetes Premiums are adjusted deshypending on how well policyholders stickto a tness plan All this suggests that theeconomic impact of the cloud may be feltnot only in the IT industry itself but in othshyer sectors too The internet disrupted themusic business Google disrupted the meshydia cloudshybased companies could becomedisrupters in other inecient industriesBuzzwords such as Health Care 20Banking 20 or even Education 20could soon acquire real meaning

But given that the cloud is global by nashyture how might it be regulated The conshyclusion of this special report will oersome answers 7

8Dangers within

Source Forrester

Research

How IT organisations feel about risk ofemployee-driven unsanctioned use of Web 20June 2008

Survey of 242 US IT decision-makers

at companies with 500+ employees

0 10 20 30 40 50

Very concerned

Somewhat concerned

Somewhat unconcerned

Completely unconcerned

14 A special report on corporate IT The Economist October 25th 2008

2

Previous special reports and a list offorthcoming ones can be found online

wwweconomistcomspecialreports

Future special reportsCountries and regionsSpain November 8thRussia November 29thIndia December 13th

Business nance economics and ideasCars in the developing world November 15th The sea January 3rd 2009The future of nance Jan 31st 2009

wwweconomistcomrights

Oer to readersReprints of this special report are available at aprice of pound350 plus postage and packing A minimum order of ve copies is required

Corporate oerCustomisation options on corporate orders of 100or more are available Please contact us to discussyour requirements

Send all orders to

The Rights and Syndication Department26 Red Lion SquareLondon WC1R 4HQ

Tel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492eshymail rightseconomistcom

For more information and to order special reportsand reprints online please visit our website

that will arise with the cloud In one way itis the ultimate form of globalisation vastvirtualised computer systems and elecshytronic services know no borders Yet govshyernments are likely to go to great lengths toavoid losing even more control

When the internet went mainstream inthe late 1990s libertarian thinkers arguedthat cyberspace was a distinct place callingfor laws and legal institutions of its ownAfter all they said it was built in such away that it interprets censorship as damshyage and routes around it But many govshyernments quickly found ways to blockcontent they deemed oensive Just look atChina and its great rewall

Controlling where data are stored andhow they are treated is harder though beshycause information can oat freely in thecloud And it is not just undemocratic govshyernments that want to control their citishyzensrsquo and companiesrsquo data indeed thereare nearly as many sets of data regulationas there are countries If we wanted to beon the safe side in terms of regulation weprobably would need 95 individual datacentres says Chuck Hollis a technologistat EMC the leading maker of storage gearwhich owns Mozy a cloud service that alshylows users to back up their data

There are technological xes to this proshyblem too Customers of Amazonrsquos storageservice for instance can have their datakept either in an American or a Europeandata centre In future cloud providers willoer many more options for where dataare kept and how they are protected Itseems possible that data as well as content

will eventually travel with security locashytion and expiry policies attached

It is when computers become virtualmachines that things get really trickyThese days IT systems are at the core ofmany companiesand just like data thesesystems can now live in a variety of placesWhat happens if they start to migrate toanother country where power is cheaperor regulation laxer Similarly if servicesare a combination of elements provided indierent jurisdictions who is liable ifsomething goes wrong

The cloudrsquos potential political and soshycial eect is only now entering the publicdebate IT rms are putting it on the agendaon both sides of the Atlantic In midshySepshytember for instance Google organised adiscussion on the subject in WashingtonDC A few days later SAP presented a whitepaper in Brussels pointing out that policyshymakers are not aware of the dramatic ecoshynomic impact of the Future Internet asthe paper calls the cloud

IT industry leaders note that ocialsfrom many countries have begun to takean interest in the cloud Some just wantdata centres to be built in their country tocreate jobs others are concerned about isshysues of law enforcement and jurisdictionThe danger they say is that cloud providshyers might be obliged to build more datacentres than are needed and have to comshyply with many dierent regulatory reshygimes Some of them have been oatingthe idea of freeshytrade zones for data censhytres where common rules would apply

Yet such ideas appear at odds with anshyother big question that could keep thecloud from growing how to protect prishyvacy Consumers expect their informashy

tion will be treated the same way on thecloud as if it were stored at home on theirown computers says Ari Schwartz of theCenter for Democracy and Technology anadvocacy group Many of the devices thatfeed into it such as sensors and cameraswill be intrusive For example Googlersquosvans go round taking streetshybyshystreet picshytures of cities for the companyrsquos onlinemap service called Streetview The picshytures are meant to help people nd theirway around but also often show passshyersshyby in embarrassing situations To proshytect their identity Google now blurs theirfaces and licence plates

Hands o my dataBut it is not only personal information thatcould get out into the open Privacy is aworry for companies tooand not just beshycause criminals or spies might intercepttheir data Once they are in the cloud govshyernments can also get their hands on themmore easily SWIFT the organisation thatmanages international bank transfers isplanning to build a data centre in neutralSwitzerland That will allow it to keep dataabout European transfers on the old contishynent where it cannot be subpoenaed bythe American government Webshybased eshymail is not safe either Thanks to the StoredCommunications Act American law enshyforcers can read peoplersquos messagesanddo not even have to tell the recipient

Just as too much regulation may keepthe cloud from rising high so could lack ofprivacy If consumers and companies canshynot be sure that their information is safethey will err on the side of caution But deshyspite all the caveats the precipitation fromthe cloud will be huge 7

14 A special report on corporate IT The Economist October 25th 2008

2

Previous special reports and a list offorthcoming ones can be found online

wwweconomistcomspecialreports

Future special reportsCountries and regionsSpain November 8thRussia November 29thIndia December 13th

Business nance economics and ideasCars in the developing world November 15th The sea January 3rd 2009The future of nance Jan 31st 2009

wwweconomistcomrights

Oer to readersReprints of this special report are available at aprice of pound350 plus postage and packing A minimum order of ve copies is required

Corporate oerCustomisation options on corporate orders of 100or more are available Please contact us to discussyour requirements

Send all orders to

The Rights and Syndication Department26 Red Lion SquareLondon WC1R 4HQ

Tel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492eshymail rightseconomistcom

For more information and to order special reportsand reprints online please visit our website

that will arise with the cloud In one way itis the ultimate form of globalisation vastvirtualised computer systems and elecshytronic services know no borders Yet govshyernments are likely to go to great lengths toavoid losing even more control

When the internet went mainstream inthe late 1990s libertarian thinkers arguedthat cyberspace was a distinct place callingfor laws and legal institutions of its ownAfter all they said it was built in such away that it interprets censorship as damshyage and routes around it But many govshyernments quickly found ways to blockcontent they deemed oensive Just look atChina and its great rewall

Controlling where data are stored andhow they are treated is harder though beshycause information can oat freely in thecloud And it is not just undemocratic govshyernments that want to control their citishyzensrsquo and companiesrsquo data indeed thereare nearly as many sets of data regulationas there are countries If we wanted to beon the safe side in terms of regulation weprobably would need 95 individual datacentres says Chuck Hollis a technologistat EMC the leading maker of storage gearwhich owns Mozy a cloud service that alshylows users to back up their data

There are technological xes to this proshyblem too Customers of Amazonrsquos storageservice for instance can have their datakept either in an American or a Europeandata centre In future cloud providers willoer many more options for where dataare kept and how they are protected Itseems possible that data as well as content

will eventually travel with security locashytion and expiry policies attached

It is when computers become virtualmachines that things get really trickyThese days IT systems are at the core ofmany companiesand just like data thesesystems can now live in a variety of placesWhat happens if they start to migrate toanother country where power is cheaperor regulation laxer Similarly if servicesare a combination of elements provided indierent jurisdictions who is liable ifsomething goes wrong

The cloudrsquos potential political and soshycial eect is only now entering the publicdebate IT rms are putting it on the agendaon both sides of the Atlantic In midshySepshytember for instance Google organised adiscussion on the subject in WashingtonDC A few days later SAP presented a whitepaper in Brussels pointing out that policyshymakers are not aware of the dramatic ecoshynomic impact of the Future Internet asthe paper calls the cloud

IT industry leaders note that ocialsfrom many countries have begun to takean interest in the cloud Some just wantdata centres to be built in their country tocreate jobs others are concerned about isshysues of law enforcement and jurisdictionThe danger they say is that cloud providshyers might be obliged to build more datacentres than are needed and have to comshyply with many dierent regulatory reshygimes Some of them have been oatingthe idea of freeshytrade zones for data censhytres where common rules would apply

Yet such ideas appear at odds with anshyother big question that could keep thecloud from growing how to protect prishyvacy Consumers expect their informashy

tion will be treated the same way on thecloud as if it were stored at home on theirown computers says Ari Schwartz of theCenter for Democracy and Technology anadvocacy group Many of the devices thatfeed into it such as sensors and cameraswill be intrusive For example Googlersquosvans go round taking streetshybyshystreet picshytures of cities for the companyrsquos onlinemap service called Streetview The picshytures are meant to help people nd theirway around but also often show passshyersshyby in embarrassing situations To proshytect their identity Google now blurs theirfaces and licence plates

Hands o my dataBut it is not only personal information thatcould get out into the open Privacy is aworry for companies tooand not just beshycause criminals or spies might intercepttheir data Once they are in the cloud govshyernments can also get their hands on themmore easily SWIFT the organisation thatmanages international bank transfers isplanning to build a data centre in neutralSwitzerland That will allow it to keep dataabout European transfers on the old contishynent where it cannot be subpoenaed bythe American government Webshybased eshymail is not safe either Thanks to the StoredCommunications Act American law enshyforcers can read peoplersquos messagesanddo not even have to tell the recipient

Just as too much regulation may keepthe cloud from rising high so could lack ofprivacy If consumers and companies canshynot be sure that their information is safethey will err on the side of caution But deshyspite all the caveats the precipitation fromthe cloud will be huge 7