Is the Motley Fool right about the cloud?

Dear Bob …

I know you don’t give investment advice, but I’m going to ask you to bend just a bit. I received my Motley Fool newsletter recently (title, for those of your subscribers who have subscriptions, is “The Two Words Bill Gates Doesn’t Want You to Hear …”), and it went on and on about cloud computing (the two words) and what an amazing investment opportunity it provides.

Some snippets:

• Bill Gates warned his team at Microsoft that this could wipe out their business empire.
• Merrill Lynch estimates this “wave … has grown into a $160 billion tsunami.”
• Global IT spending increased from under $100 billion annually in 1970 to more than $1 trillion by 2000 due to a lack of PC standards and the resulting inefficiencies.
• Every dollar a company spends on a Microsoft product results in an additional $8 in internal IT support expenses.
• Cloud computing will fix all of this — “Suddenly computers that were once incompatible and isolated are now linked in a giant network, or ‘cloud.'”
• “Everyone from individuals to multinational corporations can now simply tap into the “cloud” to get all the things they used to have to supply and maintain themselves. This will save some companies millions and make others billions.”
• Nicholas Carr, former executive editor of the Harvard Business Review, predicts, “Rendered obsolete, the traditional PC is replaced by a simple terminal — a ‘thin client’ that’s little more than a monitor hooked up to the Internet.”

That’s a lot of smart people figuring there’s a big opportunity … and the end of Microsoft.

Should I be investing? More important, should I be planning an exit from my IT career?

– Greedy, and worried

Dear G&W …

Anyone who cites Nicholas Carr can’t be completely reliable. I wrote about Carr’s version of cloud computing a while back, in “Carr-ied away,” and “Carr-toonish engineering,” (Keep the Joint Running, 2/2/2008 and 2/9/2008), and not in complimentary terms.

A lot of smart people do think cloud computing is going to be the Next Big Thing. I think it’s in the hype phase of the technology lifecycle (hype -> disillusionment -> application). There will be a place for it, but not as big a place as the prognosticators hope for.

The Motley Fool article begins with one of the worst examples of bogus metrics I’ve ever seen. It states two facts — that from 1970 to 2000, world IT spending grew from $100 billion to a cool $1 trillion per year, and drew the conclusion that it’s all due to a lack of PC networking standards.

I’m afraid the Motley Fool must have morphed into the Damned Fool, because during that same period of time, the world economy grew from $4 trillion to over $10 trillion, and that’s in inflation-adjusted dollars.

Adjusting the Fool’s numbers for inflation (the Fool didn’t state whether it was using constant dollars or not, and since it didn’t, say, I’m assuming it wasn’t), IT spending actually grew from $443 billion to $1 trillion in that period of time. Which is to say, IT spending kept pace with inflation, nothing more.

If it turns out the Fool’s numbers were inflation adjusted after all, it means that between 1970 and 2000, IT spending increased 450 percent when the world economy grew 250 percent.

Meanwhile, where computers ran little more than accounting in 1970, by 2000 they supported every dimension of the enterprise.

Seems like a pretty good deal to me — hardly a “dirty little secret.”

Beyond the numbers, the article’s logic is hopelessly flawed. It starts by explaining how expensive it is to support Microsoft applications, then presents cloud computing as the solution.

It ain’t so, because the cloud doesn’t provide applications (unless you include SaaS in your definition of “cloud,” at which point you might as well include pizza and beer in the definition). It just hosts them, and very little of the $8 of support that goes along with the $1 of software cost will be eliminated by moving hosting out of the datacenter and into the cloud.

Unless, that is, a company plans to move its employees into the cloud as well. Otherwise, whether applications descend from the clouds or are provisioned locally, you’ll still spend real money supporting end-users.

So go about your business peacefully, Pilgrim. Eventually the cloud will be useful. When it is, more IT operations professionals will find themselves working for big commercial datacenters and fewer will be employed by client-side businesses. Developers won’t be affected by the cloud.

And so far as the Motley Fool article is concerned, my analysis is that it’s more smoke than cloud.

Ignore it.

– Bob