Cloud Computing: An Unstoppable Yet Vulnerable Force

by Tony D’Altorio, Investment U Research
Wednesday, June 15, 2011

The words “cloud computing” are among the latest technology buzzwords these days.

But what does it mean?

People may be asking, “What the heck is the ‘cloud?’” Technically, it simply means storing digital files on someone else’s computer servers and then accessing those files via the internet.

Many people don’t realize that cloud computing isn’t really new. It’s actually been with us for a while now, through email services like Gmail from Google (Nasdaq: GOOG), photo services like Flickr and Picasa, and storing documents with a firms such as Dropbox.

It’s just that now with the introduction of more consumer resources like music services – Google Music, Cloud Player from Amazon (Nasdaq: AMZN) and the iCloud from Apple (Nasdaq: AAPL) – the general public is becoming more aware of cloud computing.

Apple recently announced the biggest push to date by a technology company to bring cloud computing to consumers. Its new, free iCloud service, to be launched this fall, will allow users to spread their documents, programs, photos, music, etc. among all their Apple devices seamlessly.

It’s all part of a generational trend away from owning physical media content and towards renting media content from the computing universal cloud.

And it’s happening rather quickly. Just look at how quickly people moved away from owning CDs and DVDs and became accustomed to streaming movies from companies like Netflix (Nasdaq: NFLX).

Cloudy Skies for Cloud Computing Industry

Of course, all is not blue skies for cloud computing… there are major concerns about the shift to the cloud.

One such concern is security. Large internet companies that hold vast quantities of personal data come under constant attack from hackers.

Sony (NYSE: SNE) was recently forced to admit that cyber thieves might have taken 100 million of its customers’ records. Google also revealed recently that several Gmail accounts, including some belonging to prominent U.S. politicians, were hacked.

Internet security experts say, however, that home computers are even more vulnerable. They believe it’s arguably safer to keep files in a data center run by technology professionals.

Another major concern centers on the ownership of data.

Photo-sharing service Twitpic upset its users earlier this year when it changed its terms and conditions to allow it to sell photos uploaded by its users!

There have been similar concerns at Facebook as to who owns the data. Facebook angered privacy groups by using personal data to target advertising to users of their service.

And then there’s the question of “stickiness.” Providers of cloud services like Apple, Google and Facebook will have strong profit incentives to hold on to their users to maximize revenue. They’ll do their best to limit consumers’ freedom to roam freely from cloud to cloud.

So consumers may get stuck in Apple’s iCloud and not be able to get out without a hassle. Mark Little, an analyst at Ovum, remarked, “Switching costs [from cloud to cloud] is likely to be one of the biggest parts of the cloud story.”

Finally, there are infrastructure problems connecting to the cloud. Many wireless networks today have difficulties with reliably handling constant uploading and downloading of media and other types of content.

The Cloud Computing: An Unstoppable Force

However, despite the currently cloudy outlook, the trend towards cloud computing looks unstoppable.

That means investors need to know who the winners will be in this new technology era…

Among the larger companies, the winners will consist of the usual suspects – Apple, Google, Amazon and Facebook.

The announcement by Apple of its iCloud service has leapfrogged it ahead of Google and others for now.

The back and forth will continue though between these companies. Google, for instance, is about to launch a low-cost “dumb” computer equipped only with a browser because its users will keep all their software and content in the cloud.

Among the major companies, cloud computing looks to only add to the gap between the technology leaders and the laggards.

However, that’s not to say that new leaders will not emerge among the smaller companies…

Good investing,

Tony D’Altorio