More companies look to cloud computing

But data centers aren't cheap
The slim profit margins reflect the expenses cloud computing providers must absorb to build big data centers and hire the engineers to run their software applications, while they charge relatively modest fees to use their service. What's more, they don't require their customers to pay additional money for product updates and maintenance — a gold mine for traditional software makers.

Amazon.com Inc. is among the other prominent backers of cloud computing. The Seattle-based retailer runs a Web services arm that leases data storage space and computing power to businesses much like a utility dispenses electricity, as needed, to its customers. The initiative has attracted hundreds of thousands of business users during the past two years, but analysts say it has been a financial flop so far. Amazon.com doesn't break out the unit's results.

Google doesn't disclose the results of its business applications division, but it's relatively small, too. The Mountain View-based company's non-advertising operations generated combined revenue of just $540 million during the past four quarters, while Google's advertising sales totaled $20 billion.

After studying cloud computing trends, Sanford Bernstein analyst Jeffrey Lindsay predicted Google's applications will rake in revenue of about $1.5 billion by 2012, a small share next to the estimated $18 billion for Microsoft's desktop office software.

Oracle CEO Larry Ellison doubts cloud computing will ever produce big enough profits to finance the hefty investments required to develop products sophisticated enough to satisfy major companies.

Is cloud computing the next Webvan?
Ellison has gone so far as to draw derisive comparisons between cloud computing and Webvan, an online grocery delivery service that was supposed to spell the demise of traditional supermarkets, only to go bankrupt in 2001.

"It's ludicrous (to think) that cloud computing is taking over the world," Ellison said during Oracle's annual shareholders meeting in October.

The dismissive remarks were striking given that Ellison was an early investor in Salesforce and even sat on the company's board before getting into a rift with Benioff. What's more, Ellison is the majority owner of NetSuite, with a 53 percent stake in the company.

Nelson insists Ellison hasn't lost faith in NetSuite. "We can be as profitable as a traditional software company," Nelson said. "We are still in a growth cycle."

Web-based Word, Excel to come
Microsoft is angling to protect its position as the world's largest software maker by planning what it calls a new operating system for cloud computing, called "Azure," that is supposed to make it easier to toggle between programs stored on a hard drive and on the Web. Microsoft has also said it will launch Web-based versions of its Office programs, including Word and Excel, but has not yet set a date.

Dave Girouard, who heads Google's cloud computing services for businesses, believes Microsoft's expansion will only bring more credibility to the concept and help his company sign up more paying customers.

Although it refuses to provide a specific breakdown, Google acknowledges most of the roughly 1 million businesses, government agencies and schools using its office applications rely on a free version. For nearly two years now, Google has been peddling a more sophisticated package that costs $50 annually per employee account.

The economics appealed to Genentech. Based on the number of Genentech employees granted Google software accounts, the South San Francisco-based company is paying at least $800,000 per year for the online package.

Buying and maintaining a similar software package from Microsoft, Oracle or IBM would have cost considerably more, though Genentech declined to say how much it saved by subscribing to Google's office package. Whatever the figure, the savings for Genentech won't stop there. Pierce figures the company eventually would have had to invest $70 million to $80 million to build a data center, full of computer servers, to run its software and might have had to hire more engineers and technical specialists.

"That's a huge amount of cost that won't generate $1 in sales for my company," Pierce reasons.

Barbara Nielsen, a management associate at Genentech, likes having the choice between the competing programs offered by Google and Microsoft. In the first several weeks of using Google's software, she found its word processing and calendar programs helpful for jointly working on projects with more than 50 people spread across her division.

Collaborating on team projects is easier on Google's applications because employees can edit their work from any computer with an Internet connection and then store their work so it can be reviewed and possibly expanded upon by another worker somewhere else. In contrast, employees jointly working on Microsoft's traditional office programs must send revisions back and forth.

But Nielsen still feels more comfortable using Microsoft's Excel program when she needs a spreadsheet application, partly because she prefers its features.

"We are just starting to be enlightened" about the Google applications, Nielsen said. "I don't see them as a replacement for Microsoft. I see them more as a companion."

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