More companies look to cloud computing

By Michael Liedtke

updated 6:36 p.m. ET Dec. 22, 2008

SAN FRANCISCO - Todd Pierce recently put his job on the line.

To meet the computing needs of 16,300 employees and contractors at Genentech Inc., Pierce took a chance and decided not to rely entirely on business software from Microsoft, IBM or another long-established supplier that would have let Genentech own the technology. Instead, Pierce decided to rent these indispensable products from Google Inc.

The Internet search and advertising leader will run Genentech's e-mail, as well as some word processing, spreadsheet and calendar applications, and it will do it over an online connection — an unconventional approach called "cloud computing."

The decision has turned Genentech, a biotechnology pioneer, into a lab rat for Google and other alternative software services trying to convince skeptical corporate decision makers that cloud computing is more than a pie-in-the-sky concept.

In the process, Google Inc. hopes to bleed revenue from Microsoft Corp. and surpass its biggest rival in the race to control the gears of computing.

(Msnbc.com is a joint Microsoft - NBC Universal venture.)

Genentech's chief executive, Arthur Levinson, sits on Google's board of directors, but Pierce insists those ties didn't propel his leap of faith.

After lengthy internal testing, Pierce became convinced that Google can trusted to provide critical software programs for Genentech as adeptly as it deciphers Internet search requests to sell ads.

'Surfing in front of the wave'
"You don't want to get caught clinging to the past," said Pierce, Genentech's chief information officer. "I feel like we are surfing in front of the wave instead of the back of it."

Cloud computing has already swelled into an estimated $36 billion market this year, representing roughly 13 percent of global software sales. The big question now is whether it can turn into a technology tsunami that sweeps Microsoft and other software industry staples into obsolescence.

Yet for all the potential and hype surrounding cloud computing, breaking old habits won't be easy — particularly with business-software powerhouses Microsoft, IBM Corp., Oracle Corp. and SAP AG all maneuvering to protect their existing, lucrative software franchises while also setting up their own online services to compete with the industry upstarts.

Even Genentech, the biggest U.S. company to buy Google's applications package so far, isn't ready to abandon Microsoft entirely. It's still licensing Microsoft programs like Word for writing documents and Excel for creating spreadsheets.

Typically, companies own their own software, which requires installing programs on disparate computers followed by years of expensive upkeep to keep the technology humming. In contrast, cloud computing lets companies have someone else run their software remotely for a monthly or annual fee, with users accessing the programs over live Internet connections.

Economical option
The idea has won over small business owners, government agencies and schools, and now larger companies are taking a closer look, particularly as they look for ways to save money during a brutal recession.

"Almost everyone already runs a lot of their personal life on the Internet and there is no doubt that the future of business applications will be there too," said Zachary Nelson, head of cloud computing specialist NetSuite Inc. "It's just a matter of when companies are ready to make the move."

Former Oracle executive Marc Benioff planted the seeds for the cloud computing movement nearly a decade ago when he brazenly declared "the end of software" and started Salesforce.com Inc. to sell subscriptions for a customer management program accessed over the Internet.

Benioff's San Francisco-based company is now the largest cloud computing service for businesses, with a market value of $4 billion, about 52,000 customers and revenue totaling $1 billion in its past four fiscal quarters.

But Salesforce's income of $37 million during that time translates into a measly $3.70 profit on every $100 in sales. That looks anemic alongside Oracle's net margin of about $24.80 for every $100 in sales in the comparable period.

And San Mateo-based NetSuite still hasn't eked out its first quarterly profit after a decade in business, despite steady growth that boosted its revenue during the past four quarters to $143 million.

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