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Could Computing

February 14, 2012 – Comments (4) | RELATED TICKERS: RAX , AMZN , CTXS

I keep hearing "The Cloud" on the news and how it is still the buzz word that everyone is trying to get into on the stock market. Now as for stocks, this is not something I have delved into hardly at all, however in my professional work I have had a lot of exposure to what the cloud is over the years. What I want to do is to show how the cloud is really handled and what it really means to investors. So I will use three companies as an example to show how they are very different and should not be lumped together as cloud playing stocks. Not picking on these companies in particular, but using them as a model of how the cloud works in the business space.

CTXS - Citrix Systems, is a software developer of one of the available cloud platforms.

AMZN - Amazon, While cloud computing is not their primary business,hosting cloud services is their primary exposure to leasing services to internet users.

RAX - Rackspace Hosting, is a data center that leases servers to businesses, in which cloud services are one of the options.

So what is the cloud really? It can be broken down into two basic forms. The first form being the traditional cloud service which is basically a virtual hosted server, and then other cloud'ish services such as load balancing or global points of presence.

Originally there was visualization, that is you have a single server that you break up into smaller, less powerful, virtual servers. While there are many different uses for this, there is only one use currently being used in this market that makes any business sense. That is you have a customer that can not afford, or has no need of a whole server! Now we add to this the cloud services. The only difference between a cloud server and a virtual server is that the virtual server is hosted on a cluster of servers instead of one single server. So unless the customer is them self leasing real servers to be host their own cloud services it still remains the same. The customer base of those that need to lease cloud services are those that can not afford, or do not need a real physical server! This is key to understanding the hosting business.

Originally there were two kinds of hosting, web hosting and server hosting. Web hosting if for those that needed a basic website and or other services such as e-mail accounts, databases and other internet services, most likely for a small company. Or the customer had a very high web presence with a lot of traffic causing high load on a shared hosting server so they would need to upgrade to a dedicated server, be it managed or self managed. That or perhaps they had their own web hosting company and were leasing servers from a data center hosting company. At that time there was a HUGE price difference between high end web hosting and low end server hosting. A web hosting account could run anywhere from $3 to 40$ a month, where as a dedicated server would begin right around the $100 a month range and quickly run much higher for more CPU power, RAM, disk space, service administration contracts and so on. Enter into the market virtual servers, and other methods of splitting a single server into smaller services. One could get a slice of a server instead of a whole server. Most data center companies in this day and age do not even want to deal with the over head of web hosting. Why should they? Most of their clients are web hosting companies, it is in their best interest not to compete with their own clients. So again, the virtual and cloud service solutions are marketed to their LOW END CLIENTS!

So a software company such as Citrix, their customers are companies such as Amazon and Rackspace. That places them higher on the food chain in terms of cost of supporting their product. This will keep the cost of technical support to a minimum.

A data center company such as Rackspace, their biggest and most important customers are not going to be leasing cloud services. They instead would be leasing whole servers from them and in turn they are running their own cloud services, but the bottom line is that they are leasing servers, not cloud services. The clients that are leasing the cloud services are the high volume, low end customers. This means that they are typically less skilled customers and will put pressure on keeping the cost of maintaining technical support to a slight premium.

Now we look to Amazon. This company all the way around requires them to have their own dedicated data centers, brick and mortar company just like a traditional data center company such as Rackspace. So they are simply taking extra spare space in their data center and keeping overhead low by leasing some of that space off. However as they are targeting the smaller low end clients, this will mean a high turn around in how long customers will stay, and keep the cost of supporting unskilled clients at a high premium. So from this I do not see Amazon cloud services as being a primary service, but a method of keeping the cost of the overhead of their data centers lower, so long as the cost of supporting that particular customer base from becoming too expensive.

So just some thoughts from the inside of this industry so you might consider what exactly the cloud really is behind all the hype. It is not the luxury first class newest gizmo on the internet. It is the economy model for those that do not have real money to do high end business on the internet.