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Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved. ===
Cloud computing
Clash of the clouds
Oct 15th 2009
From The Economist print edition The
launch of Windows 7 marks the end of an era in computing—and the
beginning of an epic battle between Microsoft, Google, Apple and others
| Illustration by Ian Whadcock |
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DO
YOU have plans for next weekend? If not, don’t worry: perhaps a friend
will be throwing a party to celebrate the launch of Windows 7,
Microsoft’s new operating system, on October 22nd. You’ll get help
installing the program and be shown how to use the new features. To
maximise the fun, your friend will get tips from the “HostingYourParty”
video on YouTube or go to the dedicated website, complete with
downloadable party favours and a trivia quiz (sample question: “The
Microsoft Pretzel Hunt is an annual pretzel hunt held at the Redmond
campus. True or false?”).
This is not
satire. It is a toe-curling attempt by Microsoft to create some buzz
for its new software. Fortunately for the firm, it will hardly matter,
because Microsoft dominates the market for operating systems. After the
let-down that was its predecessor, Windows Vista, Windows 7 is certain
to be a success. There is plenty of pent-up demand, because Vista’s
aged predecessor, XP, is still widely used. Reviews of Windows 7 have
been positive, some even glowing, although the software is sometimes
hard to install.
Windows 7 is
not just a sizeable step for Microsoft. It is also likely to mark the
end of one era in information technology and the start of another. Much
of computing will no longer be done on personal computers in homes and
offices, but in the “cloud”: huge data centres housing vast storage
systems and hundreds of thousands of servers, the powerful machines
that dish up data over the internet. Web-based e-mail, social
networking and online games are all examples of what are increasingly
called cloud services, and are accessible through browsers,
smart-phones or other “client” devices. Because so many services can be
downloaded or are available online, Windows 7 is Microsoft’s first
operating system to come with fewer features.
As one window closes…
The launch of
Windows 7 coincides with the closing of the book, after more than a
decade, on Microsoft’s antitrust woes. The company got into hot water
in America and Europe mainly for abusing its dominance of PC operating
systems to promote its web browser. On October 7th the European
Commission said it had all but reached a settlement with Microsoft. The
firm has agreed to give Windows users in Europe a “ballot screen” that
allows them to choose a rival browser in place of its own Internet
Explorer.
Windows is
not going to disappear soon, but cloud computing means it is no longer
so important. Other products, some being launched this autumn with less
fanfare than Windows 7, represent Microsoft’s future. Last month the
company opened two data centres that between them will contain more
than half a million servers. This month it released a new version of
Windows for smart-phones. And next month it will launch Azure, a
platform for developers on which they can write and run cloud services.
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The rise of
cloud computing is not just shifting Microsoft’s centre of gravity. It
is changing the nature of competition within the computer industry.
Technological developments have hitherto pushed computing power away
from central hubs: first from mainframes to minicomputers, and then to
PCs. Now a combination of ever cheaper and more powerful processors,
and ever faster and more ubiquitous networks, is pushing power back to
the centre in some respects, and even further away in others. The
cloud’s data centres are, in effect, outsize public mainframes. At the
same time, the PC is being pushed aside by a host of smaller, often
wireless devices, such as smart-phones, netbooks (small laptops) and,
perhaps soon, tablets (touch-screen computers the size of books).
Although
Windows still runs 90% of PCs, the fading importance of the PC means
that Microsoft is no longer an all-powerful monopolist. Others are also
building big clouds, including Google, a giant of the internet, and
Apple, renowned as a maker of hardware, with a market capitalisation
that now exceeds those of both Google and IBM, its original arch-rival
(see chart above).
Granted,
there are hundreds if not thousands of firms offering cloud
services—web-based applications living in data centres, such as music
sites or social networks. But Microsoft, Google and Apple play in a
different league. Each has its own global network of data centres. They
intend to offer not just one or two services, but whole suites of them,
with services including e-mail, address books, storage, collaboration
tools and business applications. They are also vying to dominate the
periphery, either by developing software for smart-phones and other
small devices or by making such devices themselves.
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These three
giants (for their vital statistics, see table) are already preparing
for battle. In July Google mounted a direct attack on Windows by
promising to launch a free PC operating system, Chrome OS. Rumour has
it that a basic version may hit the market on the same day as Windows
7, or soon after. Microsoft’s new operating system for smart-phones
represents its latest effort to catch up with Apple’s iPhone and
Google’s operating system for handsets, called Android. On October 12th
Apple and Google severed a tie when Arthur Levinson, a member of both
boards, resigned from Google’s. In August Eric Schmidt, Google’s chief
executive, had quit Apple’s board because “Google is entering more of
Apple’s core businesses,” in the words of Steve Jobs, the
gadget-maker’s boss.
A taxonomy of giants
Despite the
growing similarities among the three, each is a unique beast, says
Michael Cusumano, a professor at Massachusetts Institute of
Technology’s Sloan School of Management. They can be classified
according to how they approach the cloud, how they make money and how
openly they approach the development of intellectual property.
Google, you
might say, has been a cloud company since its birth in 1998. It is best
known for its search service, but now offers all sorts of other
products and services, too. It has built a global network of three
dozen data centres with 2m servers, say some estimates. Among other
things, it offers a suite of web-based applications, such as word
processing and spreadsheets. Lately it has branched out, releasing
Android for phones, and its Chrome web-browser and operating system for
PCs.
It took
Google a while to come up with a way of making money, but it found one
in advertising, its main source of revenue. It handles more than 75% of
search-related ads in America. Worldwide its share is even higher.
Google is also trying to make money from selling services to companies.
On October 12th it said that Rentokil Initial, a
pest-control-to-parcel-delivery group, would roll out Google’s online
applications to its 35,000 employees, making it the biggest company to
do so.
Google’s
reliance on advertising explains its open approach to intellectual
property. Giving Android and Chrome OS away as open-source software not
only makes life difficult for rivals’ paid-for products but also
increases demand for Google’s services and the reach of its ads. Its
openness has limits: Google says little about the architecture of its
data centres and search algorithms, because they give the company its
competitive edge. The way it organises R&D internally is open and
decentralised: self-organising teams come up with ideas for most new
services.
If Google was
born in the sky, Microsoft started on the ground. Office, its
bestselling suite of PC programs, is almost as ubiquitous as Windows.
But the company is less a stranger to cloud computing than it may seem.
It has built a network of data centres, and is starting to gain
traction after losing billions developing online services. Its Xbox
games console has powerful online features. Bing, its new search
engine, has gained a shade in market share (though it is still miles
behind Google). It is even preparing a stripped-down web-based version
of Office, and it now offers much of its business software as online
services.
However, most
of Microsoft’s revenue and all of its profit still come from
conventional shrink-wrapped software. But the company cannot leave
online advertising to Google, because consumers expect cloud services
to be free, financed by ads. Hence Microsoft’s efforts to convince
Yahoo!, another online giant, to merge its search and part of its
advertising business with Microsoft’s. The deal, sealed in July, means
that Microsoft will handle 10% of searches, against Google’s 83%, says
Net Applications, a market-research firm.
Given
Microsoft’s history, it is hardly surprising that its treatment of
intellectual property differs from Google’s. It gives other software
firms the technical information they need to write programs that run
on, say, Windows. Otherwise, it guards the underlying recipes of its
software jealously. That said, the firm now supports many open
standards and has even started using bits of open-source software.
Internally, its R&D is somewhat more centralised than Google, at
least in its online division: teams are bigger, work with more
co-ordination and get more guidance from above.
Apple, too,
came from outside the cloud. Online services have always been a bit of
an afterthought to what the company excels at: pricey but highly
innovative bundles of hardware and software, of which the iPhone is
only the latest example. Its online offerings—the iTunes store for
music and video, the App Store for mobile applications, and MobileMe, a
suite of online services—were all originally meant to drive demand for
Apple’s hardware, but the firm’s interest in the cloud has grown. It is
building a $1 billion data centre, possibly the world’s largest, in
North Carolina.
Still,
Apple’s financial health thus far has depended mainly on selling
hardware. Gadgets generate most of the firm’s revenue and profit. The
firm does not reveal its revenue from services separately, but it is
not to be sneezed at. Apple accounts for 69% of online music sales in
America and 35% of all sales, more than Wal-Mart, reckons NPD Group, a
market-research firm. Apple has so far forgone advertising revenue: its
services are ad-free, but most of them require payment. Apple’s
services are aimed at consumers, not businesses.
| Illustration by Ian Whadcock |
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Apple is also
the odd one out when it comes to openness. The word does not appear in
its vocabulary. It does not allow any other hardware-maker to build
machines using its operating system. It blocks iPhone applications it
does not approve of from appearing in the App Store. Apple is also
secretive about the way it conducts its internal R&D. Mr Jobs
clearly calls most of the shots. But insiders say that there is a
system of teams that pitch projects to him.
How will this
three-way contest play out? The last similar war was in the 1980s and
early 1990s, when Apple, IBM and Microsoft fought for mastery of the
PC. After much fire and smoke, Microsoft was victorious. Thanks to what
economists call strong network effects, which allow winners to take
almost all, Windows relegated its rival operating systems to mere
sideshows, securing fat profits for its owner.
Such a
lopsided result is unlikely this time. One reason is that the economics
of the cloud may be different from those of the PC. Network effects are
unlikely to be as strong. Much of the cloud is based on open standards,
which should make it easier to switch providers. To underline this
point and to counter arguments that it is trying to lock users in,
Google has set up the Data Liberation Front, a team of engineers whose
job is to devise ways of allowing people to transfer their data.
Unfortunately
for Google, it is equally unclear whether the most open player will
win, as Microsoft did last time. Many of Google’s new services have
failed to take off. Having control over the software on the PC,
smart-phones and other client devices, Microsoft can more easily create
what it calls “seamless experiences”, for example by keeping a user’s
address book and other personal information in step. Consumers may also
prefer Apple’s tightly integrated, easy-to-use devices and services,
despite the restrictions they impose. Lots of people buy iPods and
download music from iTunes even though it is difficult to play the
songs on other devices.
Second, all
three giants have reliable sources of cash to sustain them. Windows may
be under attack, not least because of the boom in cheap netbooks, which
has forced Microsoft to reduce prices, says Matt Rosoff of Directions on Microsoft,
a newsletter. Even so, the operating system will keep on giving for
some time. Microsoft has other strong divisions too, including business
and server software. Google may lose some market share in search (and
some advertising) to the combination of Bing and Yahoo!, but it is
unlikely to be dethroned. Apple is still able to command premium
prices, although others make hardware just as slick.
Full war chests
This means
that all three will have ample resources to spend in the main areas of
the fight: data centres, cloud services and the periphery. In data
centres, Google is ahead, but Microsoft is catching up in size and
sophistication. Apple has most to learn, but this, too, seems only a
question of time and money. Just as much of hardware has become a
commodity, knowing how to build huge data centres may not be a big
competitive advantage for long. And data centres can get only so big
before scale ceases to be an advantage.
In services
too, Google is ahead. But in Bing Microsoft may at last have created a
worthy rival. The “decision engine”, to use the company’s term, does a
good job of helping people choose a new camera or book a holiday. The
big question is whether Apple can catch up. Its iTunes and App stores
are successes, to be sure, but for now they are highly specialised. Its
broader suite of cloud services, MobileMe, is nothing to write home
about.
At the
cloud’s periphery, however, Apple has a strong position, thanks to the
success of the iPhone. More than 30m have been sold so far, 5.2m in the
quarter ending in June. Its share of the American market is pushing
14%. The App Store now boasts 85,000 applications and a total of more
than 2 billion downloads. But recently Google’s Android has gained
momentum. Several handset-makers have released smart-phones based on
it, or will do so in the next few months. In early October it received
the backing of Verizon, America’s biggest mobile operator. At the end
of 2012, predicts Gartner, a market-research firm, Android phones will
have a bigger share of the market than iPhones.
Microsoft’s
mobile strategy, though, is in disarray. This could prove to be a
serious weakness, as people increasingly use mobile devices to reach
online services. Plans to build smart-phones of its own seem to be
going nowhere. Its music player, Zune, will remain just that, Steve
Ballmer, Microsoft’s boss, said recently. Pink, a project to develop
phones based on technology from Danger, a start-up acquired by
Microsoft in 2008, is said to face death by cancellation—even more
likely after Danger lost personal data belonging to tens of thousands
of its customers earlier this month. And the latest version of Windows
Mobile is no match for the iPhone and Android. Some handset-makers,
including Motorola, have ditched the software.
However, as
with Bing, Microsoft has only recently been getting serious. It has put
Windows Mobile under new management. Another version is expected by the
end of 2010. Some analysts fancy Microsoft’s chances. According to
iSuppli, a market-research firm, “Reports of Windows Mobile’s death are
greatly exaggerated.”
What could
disrupt the three-sided struggle? The antitrust authorities, possibly.
Now that Microsoft has made peace, the other two are likelier targets.
Most observers imagine Google would be first, pointing to the
hullabaloo caused by a settlement with book publishers that allows
Google to create a vast digital library. But Apple may beat Google to
the dock. The firm’s tight control over its technology is no problem in
markets where its share is small (in PCs, it is a mere 7.2%). But in
mobile applications and digital music distribution Apple is by far the
market leader. America’s Federal Communications Commission is looking
into its refusal to carry Google Voice, a telephony and messaging
application for the iPhone. Its bar on rivals’ devices connecting to
iTunes may cause trouble too. Tellingly, Apple recently hired a lawyer
with antitrust experience: Bruce Sewell, the former general counsel of
Intel, the world’s biggest chipmaker, which the European Commission
wants to pay a fine of more than €1 billion ($1.5 billion) for abusing
its dominance.
Then there
are market forces. One of the three may come up with something
“insanely great”, an expression used at Apple in times past to describe
the original Macintosh computer. Apple itself may do so with a tablet
computer, rumoured to be ready for release as early as January. Others
have built such a dream device, but none has yet overcome the problem
of input: typing on a screen is difficult and handwriting recognition
has never really worked. If Apple has cracked it, it could upend the PC
industry, as the iPhone did the handset market. If the tablet is also a
good substitute for paper, the publishing and newspaper industries
could be in for more upheaval. The blogosphere is abuzz with rumours
that Apple is talking to publishers about offering their content on its
device.
The final
possibility is for another contender to emerge. The obvious candidates
are Amazon, the world’s biggest online retailer, and Facebook, the
leading social network. Amazon already has a cloud of sorts. It offers
cloud computing services to other online firms and has developed the
Kindle, an electronic reader, which is due to be available worldwide
from October 19th. Facebook runs what is arguably the most successful
cloud service, with more than 300m registered users. It provides a
platform for people to communicate, share information and collaborate
online—all things that businesses want to do, too.
Only one
thing seems sure about the future of the digital skies: the company or
companies that dominate it will be American. European or Asian firms
have yet to make much of an appearance in cloud computing. Nokia, the
world’s biggest handset-maker, is trying to form a cloud with its set
of online services called Ovi, but its efforts are still in their
infancy. Governments outside America may harbour ambitious plans for
state-funded clouds. They would do better simply to let their citizens
make the most of the competition among the American colossi.
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Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved. |
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