There is a paradigm shift beginning in the world of computing. Over the next decade, increasing numbers of businesses will stop purchasing their own computer servers and mainframes, and instead move their appli- cations and data to “the cloud.” The cloud is a metaphor for large data centers or “server farms”—collections of hundreds of thousands of co-located and interlinked computer servers. Corporations will be able to “host” their data and applications on cloud computing pro- viders’ servers. To run an application hosted on the cloud, all a person will need is a computing device with a Web browser and an Internet connection. There are significant cost advantages associated with shifting data and applications to the cloud. Busi- ness will no longer need to invest in information tech- nology hardware that rapidly becomes obsolete. Cloud providers will instead be responsible for maintenance costs of servers and hardware. Moreover, businesses will no longer need to purchase many software appli- cations. Instead, businesses will utilize a pay-as-you- go pricing model for any applications that they use, which also holds out the promise of reducing costs. (Some studies have concluded that 70% of software purchased by corporations is either underutilized or not used at all.) The Brookings Institute estimates that companies could reduce their information technology costs by as much as 50% by moving to the cloud. Early adopters of cloud computing services have included InterContinental Hotel Group (IHG), which has 650,000 rooms in 4,400 hotels around the world. Rather than upgrade its own information technology hardware, IHG has decided to move its central reser- vation system onto server farms owned by Amazon. com, the online retail store that is also emerging as an early leader in the cloud computing market. Similarly, Netflix has decided to utilize Amazon’s cloud services for distributing its movies digitally, rather than invest- ing in its own server farms. Another early user of cloud services is Starbucks, which has moved its entire cor- porate e-mail system off its servers and onto Micro- soft’s cloud computing system. Amazon and Microsoft are two of the early leaders in the embryonic cloud computing market. The other significant player is Google. All three companies had to build large server farms to run parts of their own businesses (online retail in the case of Amazon, and Web-searching capabilities in the case of Google and Microsoft). When these corporations soon realized that they could rent out capacity on these server farms to other businesses, the concept of cloud comput- ing was born. Other companies that have announced their intentions to enter the cloud computing market as providers of hosting services include IBM and Hewlett-Packard Right now the cloud is small—IDC indicates that worldwide, cloud services accounted for $40 billion in 2012 (just over 1% of the 3.6 trillion spent worldwide on information technology in 2012), and expects that number to grow to 100 billion by 2016. However, cloud services also threatened to redistribute who earned those revenues in information technology, attracting the attention of companies such as Microsoft and Google. Microsoft has developed an operating system, known as Windows Azure, which is designed to run software applications very efficiently on server farms, allocating workloads and balancing capacity across hundreds of thousands of servers. Microsoft is rewrit- ing many of its own applications, such as Office and SQL server, to run on Azure. The belief is that this will help the company retain existing clients as they transi- tion their data and applications from their own servers onto the cloud. Microsoft has also developed tools to help clients write their own custom applications for the cloud; it has recognized that the shift to the cloud threatens its existing Windows monopoly, and that its best strategy is to try to become the dominant com- pany on the cloud. Microsoft’s rivals were not idly standing by. Google, for example, has developed a cloud-based operating CASE DISCUSSIoN QUESTIoNS system, Google App Engine, which allows clients to efficiently run their custom software applications on the cloud, and also offers the Chrome OS for individu- als to use on dedicated Chrome tablets. Amazon, too, has its own cloud-based operating system, known as Elastic Compute Cloud, or “EC2.” Other companies, including IBM and VM Ware, are developing similar software. Software applications that are written for one cloud-based operating system will not run on another cloud operating system without a complete rewrite— meaning that there will be significant switching costs involved in moving an application from one cloud provider to another. This strongly suggests that we are witnessing the beginnings of a format war in cloud computing, much like the format war during the early 1990s between Microsoft, IBM, and Apple to dominate the desktop computer—a war that Microsoft won with its Windows operating system. If business history is any guide, at most only two or three formats will sur- vive, with most other formats falling by the wayside.

1. What are the advantages and disadvantages of using cloud services for individuals and businesses?

2. How does the adoption of cloud services affect the revenues for computer and software makers? Which companies will “win” and “lose” if individuals and businesses continue to shift to using cloud services?

3. What individual advantages do you think Microsoft, amazon, and google have in promoting their cloud-based operating systems?