Let it rise A special report on corporate IT October 25th 2008

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

Let it rise Also in this section Where the cloud meets the ground Data centres are quickly evolving into service factories. Page 3

Creating the cumulus Software will be transformed into a combination of services. Page 5

On the periphery The cloud’s communications with its clients will become ever more intelligent and interactive. Page 7

Highs and lows As IT gets cloudier, the economics of the business will change. Page 9

The long nimbus The cloud will make businesses more adaptable, interconnected and specialised‹ and often smaller. Page 11 Information technology is turning into a global Œcloud accessible from anywhere, says Ludwig Siegele. What does that mean for the way Computers without borders people conduct business? The cloud may be the ultimate form of N THE beginning computers were hu• ing‹became more distributed. globalisation. Page 13 Iman. Then they took the shape of metal Now, this special report will argue, boxes, †lling entire rooms before becom• computing is taking on yet another new ing ever smaller and more widespread. shape. It is becoming more centralised Now they are evaporating altogether and again as some of the activity moves into becoming accessible from anywhere. data centres. But more importantly, it is That is about as brief a history of com• turning into what has come to be called a puters as anyone can make it. The point is Œcloud, or collections of clouds. Comput• that they are much more than devices in a ing power will become more and more dis• box or in a data centre. Computing has embodied and will be consumed where constantly changed shape and location‹ and when it is needed. mainly as a result of new technology, but The rise of the cloud is more than just often also because of shifts in demand. another platform shift that gets geeks excit• The †rst Œcomputers were indeed peo• ed. It will undoubtedly transform the in• ple. The word originally meant an individ• formation technology (IT) industry, but it ual who solved equations, often using a will also profoundly change the way peo• Acknowledgments mechanical calculator. Hundreds of them ple work and companies operate. It will al• The author would like to thank many people besides those were employed by big companies that low digital technology to penetrate every cited in the text for their time, ideas and kindness during the preparation of this report. They include Marc needed to do a lot of number•crunching, nook and cranny of the economy and of Andreessen of Ning, Brian Behlendorf of CollabNet, Chris such as aeroplane manufacturers. It was society, creating some tricky political pro• Capossella and Tim O’Brien of Microsoft, Simon Crosby of only around 1945 that the word came to de• blems along the way. Citrix, Rob Enderle of Enderle Group, Robert Hodges of Continuent, Dirk Holzwarth of Alstom, Greg scribe machinery. Papadopoulos of Sun Microsystems, Dennis Quan of IBM, But even after that, computing kept un• Promise of heaven Simeon Simeonov of Polaris Venture Partners, Rahul Sood dergoing mutations‹or, in the jargon, plat• Here we go again, you may think. In order of SAP and Kishore Swaminathan of Accenture. form shifts. The mainframe, the original to generate new demand, the maturing IT computing platform, was dethroned by industry keeps creating new buzzwords, A list of sources is at minicomputers, which in turn gave way to often with celestial connotations (Œcyber• www.economist.com/specialreports personal computers, which are now being space, Œblogosphere), which suggest pushed aside by hand•held devices and some kind of technological nirvana. The An audio interview with the author is at smartphones. With each step the architec• reality is much more down to earth. www.economist.com/audiovideo ture‹the underlying structure of comput• Hype is indeed rampant in Œcloud com• 1 2 A special report on corporate IT The Economist October 25th 2008

of Œcloud service, including web•based Cumulonimbus 1 e•mail or online data storage (see chart 2). A young cloud 2 Cloud computing, average weekly search volumes The best example is Google, the biggest on• Cloud-computing activities, by age cohorts September average 2007=100 line search company by far, which now of• April-May 2008, % of users* fers a plethora of web•based applications 1,000 Ages 18-29 50-64 All internet users/ † such as word•processing or online spread• 30-49 65+ (All laptop users ) 800 sheets. 0 25 50 75 100 600 Learning to ‡oat 56 Web-mail services (64) 400 Companies, too, have been moving into the cloud, albeit much more cautiously. Fi• Store personal 34 200 photos (44) 100 nancial institutions in particular have for some time been building Œcomputing 0 Online 29 SOND JFMAMJJAS grids. Firms that provide enterprise soft• applications (38) 2007 2008 ware as a service (SaaS) over the internet, Source: Google Trends Store personal 7 such as Salesforce.com and NetSuite, have videos (13) been growing steadily. Pay to store 2 IT 5 puting. The term entered into •speak In the years to come companies are like• computer (10) only a year ago and has spread vora• ly to venture much farther. For one, opera• files online ciously. Cloud conferences and cloud blogs tors of computing clouds such as Amazon Back up hard drive 5 are multiplying almost as quickly as cloud and Google have shown that this is a far to an online site (9) start•ups. Established IT †rms are slapping more eˆcient way of running IT systems. Have done at 69 the new label on old gear. Secondly, many †rms will †nd they have least one activity (79) In fact, the cloud craze may have no choice. The way in which their IT infra• Have done at 40 peaked already, if the number of Google structure has grown is proving unsustain• least two activities (52)

searches is any guide (see chart 1). Cloud able. Most corporate data centres today are *Survey based on 1,553 internet users computing is bound to go through a complex warrens of underused hardware Source: Pew Internet & †35% of internet users, connecting Œtrough of disillusionment, as Gartner, a that require more and more people, space American Life Project to Wi-Fi away from home or work research †rm, calls the phase in the hype and power to keep them going. The current cycle when technologies fail to meet ex• economic malaise will increase the pres• lation and worries about the safety of both pectations and quickly cease to be fashion• sure on companies to become more eˆ• personal and corporate data. able. Much still needs to be invented for cient. More has to be done with less, which Irving Wladawsky•Berger, a technol• the computing sky to become truly cloudy. is cloud computing’s main promise. ogy visionary at IBM, compares cloud Yet even if the term is already passé, the This special report will chronicle the computing to the Cambrian explosion cloud itself is here to stay and to grow. It fol• rise of the cloud and try to predict where it some 500m years ago when the rate of lows naturally from the combination of is heading. It will start by looking at the evolution speeded up, in part because the ever cheaper and more powerful proces• technology. Computing clouds are im• cell had been perfected and standardised, sors with ever faster and more ubiquitous mensely complex, but can be roughly di• allowing evolution to build more complex networks. As a result, data centres are be• vided into three layers: infrastructure, ap• organisms. Similarly, argues Mr Wladaw• coming factories for computing services plications and the periphery where they sky•Berger, the IT industry spent much of on an industrial scale; software is increas• meet the real world. These will be discuss• its †rst few decades developing the basic ingly being delivered as an online service; ed in turn. The report will go on to consider components of computing. Now that and wireless networks connect more and the impact the cloud will have on the IT in• these are essentially standardised, bigger more devices to such o erings. dustry and the economy as a whole. The and more diverse systems can emerge. All this allows computing to be disag• conclusion will look at what might stop ŒFor computing to reach a higher level, he gregated into components‹or Œservices, the cloud from growing ever thicker: regu• says, Œits cells had to be commoditised. 7 in IT parlance. This is why European tech• nologists such as Lutz Heuser, head of re• search at SAP, a German software giant, like to refer to it as the Œinternet of ser• vices. The cloud metaphor seems more apt. The internet is used mainly by people with personal computers and a physical network connection. Cloud applications, on the other hand, will be used by billions of devices of all kinds, many of them un• tethered, but will be connected to the Œin• ternet of things. In some ways the cloud is already hang• ing in the sky, especially for consumers. Ac• cording to a recent study, 69% of Ameri• cans connected to the web use some kind The Economist October 25th 2008 A special report on corporate IT 3

Where the cloud meets the ground

Data centres are quickly evolving into service factories

T IS almost as easy as plugging in a laser of them one•o designs that have grown Iprinter. Up to 2,500 servers‹in essence, over the years, re‡ecting the history of Voracious 3 souped•up personal computers‹are both technology and the particular use to Worldwide spending, $bn, on: crammed into a 40•foot (13•metre) shipping which it is being put. It is no surprise that Power and cooling Servers, container. A truck places the container in• they are egregiously ineˆcient. On aver• Server management installed side a bare steel•and•concrete building. age only 6% of server capacity is used, ac• and administration base, m New servers Workers quickly connect it to the electric cording to a study by McKinsey, a consul• FORECAST grid, the computer network and a water tancy, and the Uptime Institute, a 250 50 supply for cooling. The necessary software think•tank. Nearly 30% are no longer in use 200 40 is downloaded automatically. Within four at all, but no one has bothered to remove days all the servers are ready to dish up them. Often nobody knows which appli• 150 30 videos, send e•mails or crunch a †rm’s cus• cation is running on which server. A wide• tomer data. ly used method to †nd out is: ŒLet’s pull the 100 20 This is Microsoft’s new data centre in plug and see who calls. 50 10 Northlake, a suburb of Chicago, one of the Limited technology and misplaced in• world’s most modern, biggest and most ex• centives are to blame. Windows, the most 0 0 pensive, covering 500,000 square feet pervasive operating system used in data 1996 98 2000 02 04 06 08 11 (46,000 square metres) and costing centres, allows only one application to run Source: IDC $500m. One day it will hold 400,000 serv• on any one server because otherwise it ers. The entire †rst ‡oor will be †lled with might crash. So IT departments just kept ŒIn a way, we’re cleaning up Microsoft’s 200 containers like this one. Michael Ma• adding machines when new applications sins, says Paul Maritz, VMware’s boss and nos, the head of Microsoft’s data centres, is were needed, leading to a condition a Microsoft veteran, Œand in doing so we’re really excited about these containers. They known as Œserver sprawl (see chart 3). separating the computing workload from solve many of the problems that tend to This made sense at the time: servers were the hardware. Once computers have be• crop up when putting up huge data cen• cheap, and ever•rising electricity bills were come more or less disembodied, all sorts tres: how to package and transport servers generally charged to a company’s facilities of possibilities open up. Virtual machines cheaply, how to limit their appetite for en• budget rather than to IT. can be †red up in minutes. They can be ergy and how to install them only when To understand the technology needed moved around while running, perhaps to they are needed to avoid leaving expen• to industrialise data centres, it helps to look concentrate them on one server to save en• sive assets idle. at the history of electricity. It was only after ergy. They can have an identical twin But containers are not the only innova• the widespread deployment of the Œrotary which takes over should the original fail. tion of which Mr Manos is proud. Micro• converter, a device that transforms one And they can be sold prepackaged as Œvir• soft’s data centres in Chicago and across kind of current into another, that di erent tual appliances. the world are equipped with software that power plants and generators could be as• VMware and its competitors, which tells him exactly how much power each sembled into a universal grid. Similarly, a now include Microsoft, hope eventually to application consumes and how much car• technology called Œvirtualisation now al• turn a data centre‹or even several of bon it emits. ŒWe’re building a global infor• lows physically separate computer sys• them‹into a single pool of computing, mation utility, he says. tems to act as one. storage and networking resources that can Engineers must have spoken with simi• be allocated as needed. Such a Œreal•time lar passion when the †rst moving assem• Virtually new infrastructure, as Thomas Bittman of bly lines were installed in car factories al• The origins of virtualisation go back to the Gartner calls it, is still years o . But the nec• most a century ago, and Microsoft’s data 1960s, when IBM developed the technol• essary software is starting to become avail• centre in Northlake, just like Henry Ford’s ogy so that its customers could make better able. In September, for instance, VMware †rst large factory in Highland Park, Michi• use of their mainframes. Yet it lingered in launched a new Œvirtual data•centre oper• gan, may one day be seen as a symbol of a obscurity until VMware, now one of the ating system. new industrial era. world’s biggest software †rms, applied it to Perhaps surprisingly, it is Amazon, a big Before Ford revolutionised carmaking, the commodity computers in today’s data online retailer, that shows where things are automobiles were put together by teams of centres. It did that by developing a small heading. In 2006 it started o ering a com• highly skilled craftsmen in custom•built program called hypervisor, a sort of elec• puting utility called Amazon Web Services workshops. Similarly, most corporate data tronic traˆc cop that controls access to a (AWS). Anybody with a credit card can centres today house armies of Œsystems computer’s processor and memory. It al• start, say, a virtual machine on Amazon’s administrators, the craftsmen of the infor• lows servers to be split into several Œvirtual vast computer system to run an applica• mation age. There are an estimated 7,000 machines, each of which can run its own tion, such as a web•based service. Devel• such data centres in America alone, most operating system and application. opers can quickly add extra machines 1 4 A special report on corporate IT The Economist October 25th 2008

2 when needed and shut them down if there mand for corporate computing continues its 57 data centres across the world from is no demand (which is why the utility is to increase, IT budgets are being cut. At the 16,000 to 10,000 yet increased their work• called Elastic Computing Cloud, or EC2). same time many †rms’ existing IT infra• load. The US Marine Corps is reducing the And the service is cheap: a virtual mach• structure is bursting at the seams. Accord• number of its IT sites from 175 to about 100. ine, for instance, starts at 10 cents per hour. ing to IDC, a market•research †rm, a quar• Both organisations are also starting to If Amazon has become a cloud•com• ter of corporate data centres in America build internal clouds so they can move ap• puting pioneer, it is because it sees itself as have run out of space for more servers. For plications around. Ever more †rms are ex• a technology company. As it branched out others cooling has become a big constraint. pected to start building similar in•house, or into more and more retail categories, it had And often utilities cannot provide the extra Œprivate, clouds. The current economic to develop a sophisticated computing plat• power needed for an expansion. malaise may speed up this trend as compa• form which it is now o ering as a service nies strive to become more eˆcient. for a fee. ŒOf course this has nothing to do Fewer, bigger, better But to what extent will companies out• with selling books, says Adam Selipsky, in So IDC thinks that many data centres will source their computing to Œpublic clouds, charge of product management at AWS, be consolidated and given a big makeover. such as Amazon’s? James Staten of Forres• Œbut it has a lot to do with the same tech• The industry itself is taking the lead. For ex• ter Research, a market•research †rm, says nology we are using to sell books. ample, Hewlett•Packard (HP) used to have the economics are compelling, particularly Yet Amazon is not the only big online 85 data centres with 19,000 IT workers for smaller †rms. Cloud providers, he says, company to o er the use of industrial• worldwide, but expects to cut this down to have more expertise in running data cen• scale data centres. Google is said to be op• six facilities in America with just 8,000 tres and bene†t from a larger infrastruc• erating a global network of about three employees by the end of this year, reduc• ture. Yet many †rms will not let company dozen data centres loaded with more than ing its IT budget from 4% to 2% of revenue. data ‡oat around in a public cloud where 2m servers (although it will not con†rm Other large organisations are following they could end up in the wrong hands. The this). Microsoft is investing billions and suit. Using VMware’s software, BT, a tele• conclusion of this report will consider the adding up to 35,000 servers a month. Oth• coms †rm, has cut the number of servers in question of security in more detail. er internet giants, such as Yahoo!, are also It does not help that Amazon and Goo• busy building huge server farms. gle recently made headlines with service In some places this has led to a veritable interruptions. Few cloud providers today data•centre construction boom. Half a doz• o er any assurances on things like con• en are being built in Quincy, a hamlet in tinuity of service or security (called Œser• the middle of America’s Washington state, vice•level agreements, or SLAs) or take on close to the Columbia River. The attraction liability to back them up. is that its dams produce plenty of low•cost As a result, says Mr Staten, cloud com• power, which apart from IT gear is the puting has not yet moved much beyond main input for these computing farms. On the early•adopter phase, meaning that average, cooling takes as much power as only a few of the bigger companies are us• computing. Microsoft’s new data centre ing it, and then only for projects that do not near Chicago, for instance, has three sub• critically a ect their business. The Wash• stations with a total capacity of 198MW, as ington Post, for instance, used Amazon’s much as a small aluminium smelter. AWS to turn Hillary Clinton’s White But cheap electricity is only one, albeit House schedule during her husband’s important, criterion for choosing the site of time in oˆce, with more than 17,000 pages, a data centre. Microsoft currently feeds 35 into a searchable database within 24 sets of data into an electronic map of the hours. NASDAQ uses it to power its service world, including internet connectivity, the providing historical stockmarket informa• availability of IT workers, even the air tion, called Market Replay. quality (dry air makes a good coolant), to Stefan van Overtveldt, the man in see where conditions are favourable and charge of transforming BT’s IT infrastruc• which places should be avoided. Appar• ture, thinks that to attract more customers, ently Siberia comes out well. service providers will have to o er Œvirtual Google, for its part, seems to be think• private clouds, fenced o within a public ing of moving o shore. In August it ap• cloud. BT plans to o er these as a service plied for a patent for water•based data cen• for †rms that quickly need extra capacity. tres. ŒComputing centres are located on a So there will be not just one cloud but a ship or ships, anchored in a water body number of di erent sorts: private ones and from which energy from natural motion of public ones, which themselves will divide the water may be captured, and turned into general•purpose and specialised ones. into electricity and/or pumping power for Cisco, a leading maker of networking gear, cooling pumps to carry heat away, says is already talking of an Œintercloud, a fed• the patent application. eration of all kinds of clouds, in the same Many chief information oˆcers would way that the internet is a network of net• love to take their IT infrastructure out to works. And all of those clouds will be full sea and perhaps drown it there. Even as de• of applications and services. 7 The Economist October 25th 2008 A special report on corporate IT 5

Creating the cumulus

Software will be transformed into a combination of services

ANT to become a programmer in 20 who takes the order and conveys it to the cheaper and more powerful chips made it Wminutes? With the program from Ice• kitchen. There is the cook who prepares possible to move from mainframes to berg, a start•up, you can. Just open the Œget• the food. And there are the cleaners who minicomputers to personal computers ting started wizard and pick the type of keep the place tidy. Together they create the (PCs) and now to hand•held devices. But application, say Œproject management. Œapplication: a restaurant. connecting all these pieces remained diˆ• Type in its Œbusiness objects‹things like cult and expensive, which meant that such Œclient, Œteam and Œmembers‹and tell An attack of the vapours devices all had to come with their own the tool how they relate to each other. The importance of this shift from a mono• data and chunky programs. Now, thanks to Then design some input forms and de†ne lithic product to services is hard to over• plenty of cheap bandwidth and more and the process for getting a project done. An• state. In a sense, it has seeded the cloud, al• more wireless connectivity, computing is other click and you are ready to go. lowing the droplets‹the services that able to regroup into specialised services, or In reality, of course, things are not that make up the electronic vapour‹to form. It Mr Gates’s subroutines: ŒWe now live in a simple. And many professional program• will allow computing to expand in all di• world whereð[a] subroutine can exist on mers will sco at the development tool as rections and serve ever more users. The another computer across the internet. a mere toy. Yet Iceberg and similar out†ts new architecture also helps the less techni• Part of Gutenberg’s genius was to recog• demonstrate that geeks are losing their mo• cally minded to shape their own clouds, nise the need for all the letters to be identi• nopoly on programming. Now, with a bit using such tools as Iceberg’s. cal in height so they could be easily com• of patience, anybody can create a simple Just as for the industrialisation of data bined. Similarly, for computing services to application, for instance, to collaborate centres, there is a historic precedent for this work there had to be robust technical stan• with colleagues or to draw an online map. shift in architecture: the invention of mov• dards. Only a few years ago this seemed far This democratisation of programming, able type in the 15th century. At the time, beyond the IT industry’s reach. Most †rms however, is only a small part of something printing itself was not a new idea. But it insisted on their proprietary technology, much deeper: a fundamental change in the was Gutenberg and his collaborators who mostly to lock in their customers. Again, nature of software. It is not just that more thought up the technologies needed to cheaper communications helped to bring and more software will become a service make printing available on a mass scale, about change. The success of the internet delivered online. More importantly, appli• creating letters made of metal that could be demonstrated the huge bene†ts of open cations, web•based or not, will no longer quickly assembled and re•used. standards and forced vendors to agree on come as a big chunk of software, but will Similarly, the concept of modularity common ways for their wares to work to• be made up of a combination of electronic has been around since the early days of gether. One result is a stack of something services‹a shift that has picked up a lot of computing. ŒEverything in computer sci• called Œweb•services standards. speed since computing began moving into ence is to just write less code. What is the Service•oriented architecture †rst the cloud. technique for writing less code? It’s called showed up in open•source software but To understand this new way of build• subroutines, said Bill Gates, Microsoft’s was quickly adopted by big enterprise• ing applications, known as Œservice•ori• founder, in a recent interview. A subrou• software vendors because they had a ented architecture (SOA), think of a culi• tine is a part of a program that can be re• pressing need for it, says Jim Shepherd of nary analogy. Whereas the old chunk of used, just like movable type. The idea, says AMR Research, a consultancy. Big software software resembles a precooked meal that Mr Gates, has always been to apply this vendors, for instance, had to †nd a way to just has to be popped into the oven, the principle of a subroutine more broadly. untangle the hairball of code that their pro• new architecture is more like a restaurant. Yet this did not happen, mainly be• ducts had become, or else they themselves It is a service in itself but also a combina• cause the cost of computing fell much fast• would choke on it. Customers wanted tion of sub•services. There is the waiter er than that of communications. Ever more ‡exible and extensible programs. 1 6 A special report on corporate IT The Economist October 25th 2008

2 Think back to the gastronomic exam• gramming tools. Users drag and drop Zoho, which is even more comprehensive. ple. A precooked meal is hard to change, Œmodules‹data feeds providing such in• It encompasses a total of 18 applications, and so are traditional software applica• formation as pictures, headlines and including word processing, project man• tions. By contrast, a restaurant can easily search results‹and weave them together. agement and customer•relationship man• change its menu and its style of operation. Most of these mash•ups are still toys, agement (CRM). Similarly, SOA•based software allows but †rms o ering software as a service As for platforms, there are already plen• companies to alter their business process• have started o ering similar combina• ty, in di erent shapes and sizes. For enter• es, such as the way they handle orders to tions. In April Salesforce.com and Google prise applications, SAP has built one called collect cash. announced that they would integrate their Netweaver. Oracle o ers something simi• SAP, a German software †rm, was one online services. Users of Salesforce, which lar called Fusion. Last year, Salesforce of the †rst companies to put this service• helps †rms manage their customer rela• launched a Œplatform as a service, allow• oriented architecture front and centre. tionships, can now quickly switch to Goo• ing other †rms to use the plumbing that Starting in 2003, it developed, among oth• gle’s web•based applications. supports its own CRM o ering. er things, a new corporate•software pack• Smaller †rms have already started to More recently platforms for consumer age that did away with monolithic applica• weave a network of services. OpSource, a services have been proliferating. Face• tions, such as programs to keep track of a Silicon Valley start•up, for instance, pro• book, a social network, was the †rst to be• company’s †nances or manage its relation• vides basic services for other SaaS †rms come one in 2007. Other big online †rms ship with customers. Instead, it introduced and web companies. TriCipher, another have followed suit or will do so soon: Goo• a collection of re•usable components that Californian newcomer, authenticates us• gle with App Engine, Yahoo! with Y!OS could be strung together at will. ers of web applications. Ribbit, for its part, and Microsoft with a Œcloud operating sys• IBM, too, is a fan of SOA and web ser• allows these services to add voice commu• tem thought to be called Windows Strata. vices. But its approach is somewhat di er• nications to their o erings. Some predict a platform war to rival the ent, given that it does not sell business ap• Yet it is unlikely that the software cloud epic †ghts between Microsoft’s Windows plications but makes most of its money will end up as a vast nebula of thousands and Apple’s Macintosh. from IT services and software to manage of specialised services. Even creating a ser• the underlying computing infrastructure. vice•oriented architecture is Œno silver bul• Never say die IBM uses SOA mainly to help †rms inte• let against complexity, in a famous phrase What shape will the software cloud take, grate their increasingly complex and dispa• by Frederick Brooks, an elder of computer other than being a vast collection of ser• rate IT systems. Its software turns them science. Although web services allow on• vices? In one way it will look much like the into a collection of services that can be line o erings to connect, for instance, it is old software world. There will be a few big woven into business processes. costly to synchronise their data. And it platforms, akin to today’s operating sys• The approaches may be di erent but would not make sense for any †rm to bet tems, and most applications will be writ• the vision is the same: to create IT systems its business on simple mash•ups. ten to one of these platforms. that adapt to the business needs of compa• As software markets mature, they tend What is less clear is just how much of nies and allow them to connect. ŒWhen I to form two kinds of clumps: integrated business and consumer software will mi• want to do something new, explains suites of applications, and platforms on grate into the cloud, and how fast. The an• Steve Mills, the boss of IBM’s software top of which others can build programs. swer depends on whom you ask. Unsur• group, ŒI do not need to build a new appli• Both forms are already emerging. On the prisingly, Marc Benio , Salesforce’s cation but can use the pieces I already applications side there is Google Apps and founder and chief executive, argues that have. To Peter Zencke, who led the devel• web applications will spell the Œdeath of opment of SAP’s new package, its most ex• software. But people are not about to citing feature is that Œany of the process Looming ever larger 4 throw out their powerful PCs or other Œcli• components can now become a service Worldwide software-as-a-service revenue*, $bn ent devices, if only because many of provided by some other †rm. Content, communications and collaborations them still work o‰ine at times. Similarly, Despite millions of dollars spent on Enterprise-resource planning companies will always want to keep some marketing SOA, it has not really taken o Supply-chain management applications in•house, for reasons of secu• yet. But many web•based applications for Customer-relationship management rity, regulation or simply to maintain con• consumers rely on this concept. The prime Office suites and digital-content creation trol. Ray Ozzie, Microsoft’s chief software Others example is Google Maps. When the online Compound annual growth architect, promotes something called rate, 2006-2011, % giant launched the service, programmers Œsoftware plus services, meaning that 12 quickly †gured out how to mix the maps FORECAST 29.1 customers will settle on Œthe right mix of with other sources of information. This is 95.7 10 old and new stu . how, for example, Housingmaps.com was If history is any guide, Mr Ozzie is more 25.9 8 created, a combination of a Google map on the mark. Even the biggest changes in IT with the rental and sales listings from 9.0 6 have never spelt the death of anything, 15.9 Craigslist, a website for classi†ed ads. It 4 notes Josh Greenbaum of Enterprise Ap• was one of the †rst Œmash•ups, as such plications Consulting. IBM, for instance, is combinations have come to be called. 20.0 2 still making money with mainframes. Since then the number of such mash• 0 So the software cloud, just like its hard• ups has exploded, thanks mainly to ser• 2005 06 07† 08 09 10 11 ware underpinnings, will be very diverse. vices like Microsoft’s Pop‡y and Yahoo! *Within the enterprise application But how will people make use of this kind Source: Gartner markets †Estimate Pipes. In essence these are graphical pro• of computing? 7 The Economist October 25th 2008 A special report on corporate IT 7

On the periphery

The cloud’s communications with its clients will become ever more intelligent and interactive

T WILL take something with a lot more with the user interface or client device of Whatever the buzzword, the principle Ibang to replace a medium that is thou• old. It will do a lot of computing itself. It is much the same. Servers no longer dish sands of years old. That was the prevailing will come in all shapes and sizes, depend• up simple hypertext markup language reaction when Amazon last November an• ing on what the user wants to do. And it (HTML), the web’s early lingua franca. In• nounced the launch of Kindle, an electron• will not just distribute information, as the creasingly, web pages are bona †de pieces ic book reader the size of a paperback that web does, but collect it as well. The analo• of software that are executed in the brows• can store more than 200 volumes. Yet by gy that springs to mind here is a theatre er. Users of Web 2.0 sites who venture into the end of this year Amazon will have sold performance with audience participation: menu items such as Œview source in their nearly 380,000 Kindles, says Mark Maha• the electronic cloud will adapt to whatever browsers can sometimes see thousands of ney, an analyst with Citigroup, a bank. it engulfs. lines of code. ŒTurns out the Kindle is becoming the iPod In recent months the browser has be• of the book world, he recently wrote in a As you like it come even more of a platform for other note to clients, in a reference to Apple’s Just like computing itself, the dominant programs, akin to an operating system iconic music player. user interface has evolved continually. In such as Windows. The main driver of this It is certainly not the Kindle’s looks that the days of the mainframe, when comput• trend is Google, with its huge strength in explain its success. Compared with the ers and their peripherals †lled entire distribution that can only gain from more iPod, its design looks very last century. rooms, people communicated with these and more software being o ered as a ser• Software and battery life, too, leave a lot to machines †rst via punch cards and then vice. In May 2007 the Silicon Valley †rm be desired. The chief attraction of the de• via green•glowing monitors, which were launched Gears, a program that allows vice is the ease with which it can be used to simply dumb terminals. Only with the rise web applications to be used o‰ine, and in buy books and other content. Equipped of personal computers did the user inter• September this year it released a new with a mobile•phone modem, the Kindle face become more intelligent, responsive browser called Chrome. Its most impor• can simply pull new reading material out and graphical. tant feature is that it can execute several so• of the air. Users do not even have to have a The †rst version of the web was thus a phisticated web applications at once. wireless service contract. ŒOur vision is to brief step backward. To be sure, browsers Although for now the internet browser have every book that has ever been in brought colour and graphics to the hither• will remain the main vehicle for people to print available in less than 60 seconds, ex• to text•based internet, but they were as interact with the cloud, other forms are plains Je Bezos, Amazon’s boss. dumb as the mainframe terminal. This has coming to the fore. One is the Œwidget, a It remains to be seen whether the Kin• changed only in recent years. A bundle of snippet of code that often lives on a PC’s dle will become a cultural phenomenon web•development techniques dubbed desktop and allows the user to get a quick like the iPod, of which around 160m have AJAX and multimedia software such as personalised view of a set of data. The idea been sold so far. Amazon, for its part, is Adobe’s Flash and Microsoft’s Silverlight is that a salesperson, for instance, should downplaying the Kindle’s success and will now allow programmers to write what are not have to †re up an entire application for not con†rm any sales estimates. But it is called Œrich internet applications (RIA). customer•relationship management to safe to say that, once the next generation of †nd out which leads to follow up. wireless networks is up and running, hun• More importantly, there is now a great• dreds of millions of devices will come, like Chatterboxes 5 er variety of hardware through which to the Kindle, with built•in radio connectivity Worldwide shipments of electronic products access the cloud. Already, desktop and lap• (see chart 5). Digital cameras will automati• with built-in wireless capability, bn top computers are starting to lose their mo• cally upload pictures. Smart meters will Products with embedded wireless networking: nopoly for sur†ng the web as smaller de• send readings of how much electricity a Local-area Total cellular Wide-area vices such as smart mobile phones and house consumes. All kinds of sensors will handsets various forms of portable computers start be able to send messages, even things like 3.0 to compete with them. dipsticks when tanks of liquid are low. FORECAST Asus, a Taiwanese computer•maker, 2.5 The relationship of these devices to started the trend when it launched a small, cloud computing may not be obvious. But 2.0 cheap laptop called ŒEee a year ago. Now if huge data centres and applications make there are dozens of these devices. Gartner 1.5 up the cloud itself, then all the hardware reckons that 5.2m of these Œmini•note• and software through which it connects 1.0 books will be sold this year, 8m next and and communicates with the real world are 0.5 as many as 50m in 2012. its periphery. In IT speak, this is known as Perhaps the best indicator of things to the Œfront end or Œclient side. 0 come is Intel, a huge chipmaker. It made a As the Kindle and other examples 2003 04 05 06 07 08 09 10 11 12 fortune selling processors for servers, per• show, this layer does not have much to do Source: iSuppli sonal computers and laptops. In June the 1 8 A special report on corporate IT The Economist October 25th 2008

long since been scrapped. But Google’s ap• proach is still the same: mining informa• tion provided by web users, such as their search histories, to provide more relevant search results and more e ective and tar• geted advertising. The direct link to users also allows †rms such as Google continuously to improve their interface, something traditional soft• ware•makers were not able to do. At any given time Google is running dozens of tests to optimise the look and feel of its of• ferings. This makes web applications far less technology•driven and much more user•oriented, says IBM’s Mr Wladawsky• Berger. ŒThey are much more inspired by what goes on in the real world. A raft of start•ups is also trying to build a business by observing its users, in e ect turning them into human sensors. One is Wesabe (in which Mr O’Reilly has invest• ed). At †rst sight it looks much like any per• sonal•†nance site that allows users to see their bank account and credit•card infor• mation in one place. But behind the scenes the service is also sifting through its mem• 2 †rm launched a new line of chips called virtualisation‹this time of client devices, bers’ anonymised data to †nd patterns and Atom, designed to power what it calls Œnet• not servers. With the help of software from to o er recommendations for future trans• books and Œmobile internet devices VMware and others, some †rms have al• actions based, for instance, on how much a (MIDs), mainly intended for sur†ng the ready virtualised their employees’ desktop particular customer regularly spends in a web. Intel is also the driving force behind computers, which allows them to be man• supermarket. Wireless devices, too, will in• WiMAX, a technology for wireless broad• aged centrally. Operating systems and ap• creasingly become sensors that feed into band access to the internet. It wants to put plications will no longer run only on the the cloud and adapt to new information. a WiMAX radio chip into as many devices employee’s PC but on a virtual machine in Nokia, for its part, is planning to build as possible, from portable computers to a data centre that can be accessed remotely, all kinds of sensors into mobile phones to specialised gadgets such as the Kindle. theoretically from any PC in the world. monitor things like movement, barometric Apple’s iPhone and its App Store, Sooner or later mobile devices will also be• pressure or even the owner’s health, which allows iPhone and iPod owners to come virtualised. Users will be able to use which many experts expect to become a download applications, also provide a their applications and data on whichever big new trend. Sensors could also be used foretaste of how important wireless de• gadget they have at hand. to record people’s activities, creating what vices will be for the cloud. Apple launched Yet the cloud’s interface is designed not some already term a Œlifelog‹raising all App Store only in July. Two months later it merely to provide information but to gath• kinds of privacy concerns. had already tallied 100m downloads, er it as well. The future belongs to services As wireless technology gets better and meaning that it took o much faster than that respond in real time to information cheaper, more and more di erent kinds of Apple’s highly successful iTunes music provided either by their users or by non• objects will connect directly to the cloud. store. Many of the programs on o er con• human sensors, predicts Tim O’Reilly, the SAP, the German software•maker, has nect to the cloud, including news feeds, founder of O’Reilly Media, a publisher of launched a research project called ŒThe In• multi•player games and a service that technology books who coined the term ternet of Things to see what can be done keeps track of the latest polls for America’s ŒWeb 2.0. Such Œlive applications, he with the resulting information. As part of presidential election. says, will get better the more data they are that project, an initiative called the ŒFuture able to collect‹and there will be plenty as Factory is now under way to investigate You can take it with you the cloud expands. how intelligent tags can make manufactur• The plethora of devices wirelessly con• One of the †rst examples of such a ser• ing more adaptive and eˆcient. nected to the internet will speed up a shift vice was Google. What originally put the More and more data get you only so far, that is already under way: from a Œdevice• search service ahead of the competition however. In the end, Google’s search re• centric to an Œinformation•centric world, when it was launched a decade ago was its sults and its text•based online advertise• in the words of VMware’s Paul Maritz. Up way of harvesting the information provid• ments are relevant to users only because in the cloud there will be a body of data for ed by web users in linking to other sites: the †rm has devised clever ways to sift each individual that will accompany them the more links point to a page, the more through them, says Hal Varian, the †rm’s through life, he explains, and it will not be useful it must be. These days most links are chief economist. The big challenge of the tied to any particular device, as it is today. generated by computers, so the original cloud will be to connect the myriad data in Again, what will make this possible is form of this Œpage rank algorithm has it and make them pro†table. 7 The Economist October 25th 2008 A special report on corporate IT 9

Highs and lows

As IT gets cloudier, the economics of the business will change

VEN elephants can die. In 1993 extinc• ual †rms’ share of the global IT budget (see Etion came close for IBM, then the chart 6) will shift. Follow the money 6 world’s largest computer•maker (it has The move to distributed computing, Worldwide end-user spending, $trn since been overtaken by HP). Its main• which started in the mid•1980s, led to a big Computer hardware Telecoms frame business was collapsing and pro†ts change in the IT industry. In the era of the Software equipment were plummeting. At that point Louis mainframe computing came in a vertically IT services Telecoms services Gerstner took over as chief executive and integrated package, mainly from IBM. With 4 managed to turn the company around. distributed computing the industry be• ŒOnly a handful of people understand came a stack of horizontal layers. In cor• how precariously close IBM came to run• porate IT these were mainly hardware, the 3 ning out of cash in 1993, he writes in his network, infrastructure software (such as memoir, ŒWho Says Elephants Can’t operating systems and databases), enter• 2 Dance? ŒWhether we would have had to prise applications and IT services. †le for bankruptcy, I can’t say. Not all of these layers were created 1 There are many reasons why IBM near• equal. Computer•makers commanded a ly went belly•up, not least the fact that Big thicker one, for instance, but software com• 0 Blue had become a bureaucratic monster. panies were more pro†table. The key pro• 2006 07 08* 09* Source: Gartner *Forecast But most critically, it had failed to adapt to gram was the operating system, both on the industry’s †rst big platform shift, servers and on personal computers (Œcli• which only really made itself felt in the ear• ents). It was the standard to which other will also become increasingly diˆcult be• ly 1990s: the move from mainframes to components of IT systems had to conform. cause the layers are becoming less distinct. smaller machines, †rst so•called minicom• Usually this was a version of Windows, In a world of services it often does not puters, then personal computers. ŒIBM which made Microsoft the IBM of this new make sense to think of hardware and soft• was slow, very slow, in delivering distri• era of computing. ware separately, argues Padmasree War• buted computing, and many small compa• Cloud computing is unlikely to bring rior, the chief technology oˆcer of Cisco. nies moved in to †ll the gap, Mr Gerstner about quite such a dramatic shift. In es• Both need to be blended to o er new ser• writes. sence, what it does is take the idea of distri• vices, she says. It is unlikely that the move into the buted computing a step farther. Still, it will cloud will produce a similar near•death ex• add a couple of layers to the IT stack. One is Mix and match perience or even a real casualty‹if only be• made up of the cloud providers, such as Even though the IT stack may not change cause IBM still stands as a warning. But Amazon and Google. The other is software all that much, the perceived value of the that does not mean that the structure of the that helps †rms to turn their IT infrastruc• di erent layers will shift, and with it the IT industry will remain unchanged, nor ture into their own cloud, known as a Œvir• amount of pro†t IT †rms can make from that the economics will stay the same. tual operating system for data centres. each of them. Who will lose and who will Once the IT sky really clouds over, individ• Drawing a neat diagram of the IT stack win depends on how much of computing 1 10 A special report on corporate IT The Economist October 25th 2008

2 eventually moves into the cloud. have made billions by selling their pro• work together and help customers move In the †rst round almost everybody in grams, often demanding hefty sums to in• their computing around. This is music to the IT industry will do well as the clouds stall them and then charging an annual the ears of big IT †rms, not least IBM. Near• are being built. The biggest winners are maintenance fee for upgrades and techni• ly 80% of its revenues come from infra• likely to be hardware•makers, says Mark cal support. But this highly lucrative busi• structure software and IT services, which it Stahlman of Gartner: ŒHardware always ness model has come under increasing can o er globally. HP is catching up, having wins when new demand for computing is pressure, says Michael Cusumano, a pro• taken over EDS, another big IT•services uncovered. And we haven’t had such a fessor at the Massachusetts Institute of †rm. Both Microsoft and SAP, for their part, sweeping global demand since the 1990s. Technology (MIT). believe that †rms will want to have a But in the longer term there will be rela• For one, he says, software vendors will choice in where to do their computing, as tive winners and losers. The hardware have to †nd new ways to charge for their well as the ‡exibility to move things business could actually †nd itself in the wares: in the cloud, tying licensing fees to around over time. losing group. Its margins could get the number of users, for instance, will be Two potentially important contestants squeezed as cloud computing matures be• diˆcult, since services will mostly be con• are rarely mentioned: Cisco and EMC, the cause there will be fewer customers with sumed by other machines. More impor• leading makers of networking and storage more buying power, says James Staten of tantly, the corporate world has become gear respectively. Having invested a lot in Forrester Research. Large cloud providers less and less willing to buy software for software and services, Cisco has become can dictate how to build servers and at large sums of money, so software †rms list• more than just the source of most of the what price, he notes. ed on America’s stockmarkets now make world’s routers, the traˆc cops of the inter• All that may explain why hardware• most of their pro†ts from maintenance net. It is betting that in the cloud the net• makers were among the †rst to jump on and other services (see chart 7). SAP will in• work layer will become more important, the cloud•computing bandwagon. So far, crease its annual maintenance fees to at for instance to ensure that computing they have done only what Mr Staten calls least 22% of a program’s value over the workloads are able to move around se• Œcloud•washing: relabelling existing pro• next few years, in line with those of Oracle, curely. EMC, for its part, has made two doz• ducts that help customers build a more its main rival. en cloud•related investments and ‡exible IT infrastructure. But they are also Yet the biggest challenge for software launched a cloud•infrastructure division. preparing for a time when more money †rms is to become providers of online ser• Whoever manages to own the domi• can be made building clouds than building vices themselves, says Brent Thill of Citi In• nant operating system for the data centre computers. IBM and HP, for instance, have vestment Research. So far they have could become a big winner. VMware is teamed up with other †rms and universi• moved slowly, o ering SaaS only on the bound to have a shot at this. As well as be• ties to design new cloud architectures. side, if at all. This was partly because their ing the market leader in virtualisation, it customers were not that keen. But more has the support of EMC, which holds 86% Which side of the fence? importantly, notes Mr Thill, the software of the †rm. But the competition is likely to In the long run, says Mr Staten, hardware• houses are still wedded to their old busi• be intense. makers may be torn between supplying ness model. With SaaS they do not get a big Will this prospective platform war pro• cloud providers or becoming providers upfront payment, only subscription fees. duce a dominant company in the mould of themselves. Being both will not be easy, Once Salesforce and NetSuite had IBM or Microsoft that is able to extract because the †rms would be competing shown that the SaaS model works, the in• more than its fair share of the pro†ts? Prob• with their biggest customers. Dell seems to cumbents began to move faster. In Septem• ably not, because it will be relatively easy have decided to be a cloud supplier. Sun ber last year, for instance, SAP presented to switch between vendors, says George Microsystems is a candidate to become a ŒBusiness ByDesign, a package of web• Gilbert of Tech Strategy Partners, a consul• provider; it is o ering a cloud•like service based enterprise applications for smaller tancy. Nor is it likely that one †rm will called Network.com, albeit not very suc• businesses. But success will not come easi• manage to build a global cloud monopoly. cessfully. HP and IBM, already used to the ly. SAP has slowed down the introduction Although there are important economies balancing act of selling hardware and pro• of the new service because it still needs to of scale in building a network of data cen•1 viding IT services, will try to do both. work out how to run it cheaply enough to Makers of traditional software will †nd make a reasonable pro†t. the going even tougher. With the advent of Pure SaaS providers also have a lot on Serving up a treat 7 open•source software, in particular Linux, their minds. Some experts, such as Joshua US-listed software-firms’ sales, % of total selling operating systems had already be• Greenbaum of Enterprise Applications come less pro†table. In a virtual world Consulting, reckon that few will ever be as 0.7 they will become even more commodi• pro†table as traditional software †rms. Al• Products tised, which is bad news for Microsoft. though it is almost a decade old, Salesforce 0.6 Many business applications no longer started making money only in 2006, main• 0.5 need a big, general•purpose server operat• ly because it †rst had to spend heavily on ing system but can use a specialised one, marketing to attract customers. But now 0.4 which should put pressure on prices. On that the service has 1m users and revenues Services client computers, more and more applica• of more than $1 billion, these costs will 0.3 tions are written to run in browsers, not on come down, says the †rm. any particular operating system. The companies that have the best 1990 92 94 96 982000 02 04 06 Makers of business applications are chance of making money from the cloud Source: Michael Cusumano, Massachusetts Institute of Technology also on the defensive. Traditionally they are those that get things to connect and The Economist October 25th 2008 A special report on corporate IT 11

2 tres, the computing needs of companies products, such as the browser, that are and consumers vary too widely for one complementary to its cash cows, such as size to †t all. Windows: as their cost came down, de• Even if the cloud is likely to transform mand for Microsoft’s products went up. the IT industry, some things will stay the Similarly, Google’s natural instinct is to same. One is the importance of lock•in. If do its utmost to encourage people to spend anything, companies and developers will more time online, because that will give be even more dependent on cloud plat• the company more opportunities to sell forms and applications than they are on advertisements and collect data about the old kind. SaaS promotes the Œhollow• them. According to Mr Carr, almost every• ing out of IT: a †rm that needs to migrate thing the company does‹building huge to another system will no longer have the data centres, †ghting copyright restrictions, required expertise. When Facebook, say, digitising the world’s libraries, developing makes a change to its platform, developers a new browser and, most recently, even have no choice but to go along with it. helping to launch satellites‹is aimed at in• Some are already calling for a ŒCloud creasing the use of the internet. ŒGoogle Computing Consortium, in the mould of wants information to be free, he recently the World Wide Web Consortium (W3C), wrote in his blog, Œbecause as the cost of in• to set standards that allow applications to formation falls it makes more money. migrate easily from one platform to anoth• But Google may never become as pow• er. One standard initiative, called ŒOpen• erful as Microsoft because regulators are Social, already allows the same web• unlikely to let it. Microsoft was eventually based application to run in several social put in the dock for abusing its monopoly networks, which are also clouds of sorts. because it got too greedy, pushing most of But standards go only so far. Some fear dards, and its loose structure does not lend the rest of the industry to complain. Given that one company could try to monopolise itself to locking customers in. that the world has already lived through other key parts of the cloud; ironically, Mi• Mr Schmidt promises that Google will the Microsoft drama and that Google will crosoft worries that Google is doing exact• not lock its users in either. ŒOur competi• a ect many more industries, the search ly that with the online advertising market. tive advantage is not from lock•in, he says, company is likely to be restrained much To Steve Ballmer, Microsoft’s boss, Goo• Œbut from having specialised knowledge earlier. The †rm is currently in negotiations gle’s advertising platform is like a ‡ywheel of how to build data centres and how to with the US Justice Department about a that picks up speed as more websites at• build new software that is not reproduc• controversial advertising partnership be• tract more advertisers, and vice versa. ible, such as our search algorithm. This is tween itself and one of its competitors, Ya• Eric Schmidt, Google’s chief executive, how we make our money. hoo!, which would further strengthen denies any evil intent to achieve world Yet Google is more like Microsoft than it Google’s position in online advertising. domination. He argues, with some justice, likes to admit, says Nicholas Carr, a tech• Even if the economics of the cloud are that it would be hard for Google to control nology writer and blogger. Microsoft, he still in ‡ux, though, it is already clear that it the cloud, if only for technical reasons: argues, achieved its dominant position in will have far•reaching implications for much of it is already based on open stan• the PC world not least by commoditising businesses and for society as a whole. 7 The long nimbus

The cloud will make businesses more adaptable, interconnected and specialised‹and often smaller

USINESSES, as well as most organi• mism that led up to the internet bubble. self: more adaptable, more interwoven ŒB sations outside the business world, Now, after two busts, several wars and and more specialised. These develop• begin to shift from hierarchical processes growing fears of global warming, it makes ments may not be new, but cloud comput• to networked ones. Nearly every facet of for somewhat surreal reading. ing will speed them up. human activity is transformed in some The cloud lends itself to similar hyper• Corporate IT has always promised to way by the emergent fabric of interconnec• bole. Yet so far there has not been much de• make companies more agile. In the 1990s tion. This reorganisation leads to dramatic bate about its economic fallout‹probably many companies re•engineered their busi• improvements in eˆciency and produc• because the Œnew economy ended badly ness processes when they started using a tivity. So said Wired magazine, the central and the newest one is currently doing even form of software called enterprise•re• organ of Web 1.0, in July 1997 in an essay en• worse. There will be many ways in which source planning (ERP), which does things titled ŒThe Long Boom, arguing that the the cloud will change businesses and the such as managing a †rm’s †nances and world was in for Œ25 years of prosperity, economy, most of them hard to predict, but employees. But once these massive soft• freedom and a better environment. Back one theme is already emerging. Businesses ware packages were in place, it was exceed• then, the article re‡ected the general opti• are becoming more like the technology it• ingly diˆcult to change them. Implement•1 12 A special report on corporate IT The Economist October 25th 2008

2 ing SAP, the market leader in ERP, is like oriented architecture will be even more visors, a consultancy. pouring concrete into your company, goes important for existing †rms because it This also means that companies will an old joke among IT types. should free their inner workings‹their rely more on services provided by others. This helps to explain why in many Œbusiness processes‹from the straitjacket They will increasingly form Œprocess net• †rms IT departments and business units of their ERP systems and allow these pro• works, a term for loosely connected have traditionally been at loggerheads. In cesses to be more easily adapted, for in• groupings of specialised †rms coined by recent years tensions have worsened. stance to launch a new product. John Hagel, a business strategist at Deloitte Companies must grapple with ever•chang• Again, the software industry has been & Touche, an auditing †rm. His prime ex• ing markets and regulations, yet IT budgets promising this for some years under the ample is Li & Fung, a company based in are being cut. Many †rms now have a huge banner of service•oriented architecture, Hong Kong that has assembled a global backlog of IT projects. discussed in an earlier chapter. Yet the process network of nearly 10,000 business Hence the interest in cloud computing. adoption of SOA has been slow and many partners in the clothing industry from It turns capital expenditure into operation• projects have failed, says Chris Howard of which it puts together customised supply al expenditure, which makes things much the Burton Group, a consultancy. The rea• chains for clothes designers. easier and cheaper. Instead of having to sons are not just technical but cultural; for Both trends could mean that in future shell out a lot of money for, say, a server to example, some business units are not used huge clouds‹which might be called Œin• test an application and, even with luck, to sharing data. Cloud computing will help dustry operating systems‹will provide wait a few weeks for it to be up and run• resolve some of these problems. Many basic services for a particular sector, for in• ning, managers just have to whip out a web•based services are built to be integrat• stance †nance or logistics. On top of these credit card, open an account at Amazon ed into existing business processes. systems will sit many specialised and in• Web Services (AWS) and †re up a virtual terconnected †rms, just like applications machine for a few dollars. Don’t do it yourself on a computing platform. Yet this is only In many †rms senior managers proba• What e ect will all this have on the nature half the story. The cloud changes not only bly do not even know that business units of the †rm? If IT systems really allow com• the plumbing and structure of †rms and are using AWS or similar services. In some panies to become more modular and ‡ex• industries, known as the Œtransactional organisations, however, it has already be• ible, this should foster further specialisa• layer, but also their Œinteractional layer, come a much•appreciated R&D tool. Phar• tion. It will become even easier to a term coined by Andy Mulholland, chief maceutical companies, for instance, are outsource business processes, or at least technologist of Capgemini, a consultancy. regularly tapping into AWS to calculate those parts of them where †rms do not en• He de†nes this as the environment where simulations. Sogeti, a European consultan• joy a competitive advantage. Companies all the interactions between people take cy, has used a cloud built by IBM to allow it will increasingly focus on their Œcore and place, both within an organisation and to test new ideas and quickly put together shed the Œcontext, in the words of Geof• with its business partners. an IT system for a company•wide brain• frey Moore, managing director of TCG Ad• Despite all the technology that has en•1 storming event. Cloud services have also been hugely successful with start•ups, which can now enjoy infrastructure of the same quality as large companies. In fact, AWS is probably the main reason why there are now so many †rms o ering all kinds of ŒWeb 2.0 services. Their usefulness may sometimes be hard to gauge, but that is a good thing. It is a sign of lively Œcombinatorial innova• tion, made possible because entrepre• neurs can cheaply try new combinations of technology, says Google’s Mr Varian. Many start•ups would probably not even exist without the cloud. Take Ani• moto, a service that lets users turn photos into artsy music videos using arti†cial in• telligence. When it launched on Facebook, a social network, demand was such that it had to increase the number of its virtual machines on AWS from 50 to 3,500 within three days. ŒYou could give me unlimited funding, says Adam Selipsky of AWS, Œand I wouldn’t know how to deploy that many servers in 72 hours. Combinatorial innovation should also be made easier by the fact that the cloud will be a huge collection of electronic ser• vices based on standards. But this service• The Economist October 25th 2008 A special report on corporate IT 13

2 tered the workplace in recent years, so far ahead. ŒThe biggest promise is that it will this layer has not really changed. PCs cer• Dangers within 8 make computing cheaper and easier to tainly made people more productive, but How IT organisations feel about risk of use‹and thus allow it to penetrate new most of their programs were not designed employee-driven, unsanctioned use of Web 2.0* markets, says Russ Daniels, chief technol• for collaboration. The enterprise applica• June 2008, % ogy oˆcer for HP’s cloud•services strategy. tions they worked with were still central• 0 10 20 30 40 50 ised systems. And e•mail has in some ways Hop, skip and jump Very made things worse as the ‡ood of mes• concerned The mobile phone has already enabled de• sages takes up lots of time and attention. Somewhat veloping countries to skip †xed•line net• The dominant model is still that people concerned works. Cloud computing could prove to be †rst labour individually and then merge Somewhat a similar Œleapfrog technology because it their respective e orts, says Mr Mulhol• unconcerned dispenses with the need to build a cumber• land. ŒIt’s not much di erent from the age Completely some IT infrastructure. ŒSoftware develop• of paper, he writes in his book ŒMesh Col• unconcerned ers from a developing country can build laboration. ŒCollaboration often means Source: Forrester *Survey of 242 US IT decision-makers just as great an application on our platform Research at companies with 500+ employees pulling up your chair next to your col• as somebody who lives in Palo Alto, says league so you can look at the same screen. Mr Benio of Salesforce. Consumers have pulled ahead of com• ployees will increasingly resist constraints Indeed, countries such as India will cer• panies in using cloud•based services that on their use of technology, and they will tainly take a big chunk of the global market allow for better collaboration, such as have a growing need to reach beyond the for cloud services. Zoho, a popular suite of blogs, wikis and social networks. The †rst corporate †rewall. Twenty years ago, he ar• web•based applications, is operated by an generation of people that has grown up us• gues, 80% of the knowledge that workers Indian company, AdventNet. Indian hospi• ing all these tools is now entering the required to do their jobs resided within tals are already o ering specialised health• workforce. Being used to a culture of shar• their company. Now it is only 20% because care services this way. The insurance arm ing information freely, these Œdigital na• the world is changing ever faster. ŒWe need of ICICI, an Indian bank, has used the tives will be impatient with the rules of to be open to new and unknown connec• technology to come up with innovative traditional corporate IT. tions with people and content, he says. services such as a personalised insurance So it is helpful that †rms have at last be• Exploiting the Œmesh, in the words of for diabetes. Premiums are adjusted de• gun to embrace Web 2.0 technologies in Mr Mulholland, will also mean that em• pending on how well policyholders stick earnest, a trend predictably called Enter• ployees may build simple applications of to a †tness plan. All this suggests that the prise 2.0. By 2013 companies around the their own that allow them quickly to auto• economic impact of the cloud may be felt globe will spend $4.6 billion on such tools, mate repeat tasks, using internal and exter• not only in the IT industry itself but in oth• according to Forrester Research. What no• nal IT services. A new product by Serena er sectors too. The internet disrupted the body knows is how †rms will trade o the Software called Mashup Composer gives a music business; Google disrupted the me• advantages of letting employees collabo• foretaste of things to come. Using a visual dia; cloud•based companies could become rate with the outside world against the as• interface, even the not so technically mind• disrupters in other ineˆcient industries. sociated risks, for instance that con†den• ed can quickly put together a service to Buzzwords such as ŒHealth Care 2.0, tial information is leaked. Because of such deal, say, with travel requests or approve ŒBanking 2.0 or even ŒEducation 2.0 security concerns (see chart 8), many †rms documents. could soon acquire real meaning. block access to such sites as Facebook on Yet the impact of the cloud will also be But given that the cloud is global by na• company computers. felt on a macroeconomic level. Just as it ture, how might it be regulated? The con• Companies may not have much choice makes small †rms more competitive, it clusion of this special report will o er but to open up, says Mr Mulholland. Em• will help developing economies to move some answers. 7 Computers without borders

The cloud may be the ultimate form of globalisation

EADERS may be excused if they have of sorts. Data Islandia, a local company, is ing borders in the cloud: it intends to store Rnever heard of Kinakuta. It is a tiny is• trying to establish the island as a vault for a European data according to European reg• land dreamed up by Neal Stephenson in growing pile of data that †rms must retain ulation and American bits according to his novel ŒCryptonomicon. In the sci• in order to comply with all kinds of regula• American rules. What is more, to keep the ence•†ction classic, libertarian technolo• tions. It has a compelling pitch. With its data safe during transport, they are picked gists and entrepreneurs try to turn it into a cool climate, abundant geothermal energy up with a Œdata scooter (in essence a con• data haven for such things as anonymous and secure remoteness, Iceland appears to tainer †lled with disk drives) and taken to online banking and electronic money. be a prime location for data archives. Iceland by aeroplane‹as though †bre•op• Reality has indeed caught up with fan• As often, however, truth is stranger tic links had never been invented. tasy. Iceland is about to become a Kinakuta than †ction. In a way, Data Islandia is erect• This illustrates the political tensions 1 14 A special report on corporate IT The Economist October 25th 2008

will eventually travel with security, loca• tion will be treated the same way on the tion and expiry policies attached. cloud as if it were stored at home on their It is when computers become virtual own computers, says Ari Schwartz of the machines that things get really tricky. Center for Democracy and Technology, an These days IT systems are at the core of advocacy group. Many of the devices that many companies‹and just like data, these feed into it, such as sensors and cameras, systems can now live in a variety of places. will be intrusive. For example, Google’s What happens if they start to migrate to vans go round taking street•by•street pic• another country where power is cheaper tures of cities for the company’s online or regulation laxer? Similarly, if services map service called ŒStreetview. The pic• are a combination of elements provided in tures are meant to help people †nd their di erent jurisdictions, who is liable if way around, but also often show pass• something goes wrong? ers•by in embarrassing situations. To pro• The cloud’s potential political and so• tect their identity, Google now blurs their cial e ect is only now entering the public faces and licence plates. debate. IT †rms are putting it on the agenda on both sides of the Atlantic. In mid•Sep• Hands o my data tember, for instance, Google organised a But it is not only personal information that discussion on the subject in Washington, could get out into the open. Privacy is a DC. A few days later SAP presented a white worry for companies too‹and not just be• paper in Brussels pointing out that policy• cause criminals or spies might intercept makers are not aware of the dramatic eco• their data. Once they are in the cloud, gov• nomic impact of the ŒFuture Internet, as ernments can also get their hands on them the paper calls the cloud. more easily. SWIFT, the organisation that 2 that will arise with the cloud. In one way it IT industry leaders note that oˆcials manages international bank transfers, is is the ultimate form of globalisation: vast from many countries have begun to take planning to build a data centre in neutral virtualised computer systems and elec• an interest in the cloud. Some just want Switzerland. That will allow it to keep data tronic services know no borders. Yet gov• data centres to be built in their country to about European transfers on the old conti• ernments are likely to go to great lengths to create jobs; others are concerned about is• nent, where it cannot be subpoenaed by avoid losing even more control. sues of law enforcement and jurisdiction. the American government. Web•based e• When the internet went mainstream in The danger, they say, is that cloud provid• mail is not safe either. Thanks to the Stored the late 1990s, libertarian thinkers argued ers might be obliged to build more data Communications Act, American law en• that cyberspace was a distinct place calling centres than are needed and have to com• forcers can read people’s messages‹and for laws and legal institutions of its own. ply with many di erent regulatory re• do not even have to tell the recipient. After all, they said, it was built in such a gimes. Some of them have been ‡oating Just as too much regulation may keep way Œthat it interprets censorship as dam• the idea of Œfree•trade zones for data cen• the cloud from rising high, so could lack of age and routes around it. But many gov• tres where common rules would apply. privacy. If consumers and companies can• ernments quickly found ways to block Yet such ideas appear at odds with an• not be sure that their information is safe, content they deemed o ensive. Just look at other big question that could keep the they will err on the side of caution. But de• China and its Œgreat †rewall. cloud from growing: how to protect pri• spite all the caveats, the precipitation from Controlling where data are stored and vacy. ŒConsumers expect their informa• the cloud will be huge. 7 how they are treated is harder, though, be• cause information can ‡oat freely in the O er to readers Future special reports cloud. And it is not just undemocratic gov• Reprints of this special report are available at a Countries and regions ernments that want to control their citi• price of £3.50 plus postage and packing. Spain November 8th zens’ and companies’ data: indeed there A minimum order of †ve copies is required. Russia November 29th are nearly as many sets of data regulation India December 13th Corporate o er as there are countries. ŒIf we wanted to be Customisation options on corporate orders of 100 Business, †nance, economics and ideas on the safe side in terms of regulation, we or more are available. Please contact us to discuss Cars in the developing world November 15th probably would need 95 individual data your requirements. The sea January 3rd 2009 centres, says Chuck Hollis, a technologist The future of †nance Jan 31st 2009 Send all orders to: at EMC, the leading maker of storage gear, which owns Mozy, a cloud service that al• The Rights and Syndication Department lows users to back up their data. 26 Red Lion Square WC1R 4HQ There are technological †xes to this pro• London Tel +44 (0)20 7576 8148 blem, too. Customers of Amazon’s storage Fax +44 (0)20 7576 8492 service, for instance, can have their data e•mail: [email protected] kept either in an American or a European data centre. In future, cloud providers will For more information and to order special reports Previous special reports and a list of o er many more options for where data and reprints online, please visit our website forthcoming ones can be found online are kept and how they are protected. It www.economist.com/rights www.economist.com/specialreports seems possible that data as well as content