Imagine building a house knowing that if you wanted electricity, you would also have to build your own electrical power plant!  The amount of additional knowledge you would need is … unfathomable.   The additional expense would be … incomprehensible.  But that is what corporations have been doing for decades in their migration to new technology.  That is … until the “Cloud” came along.  A Cloud made possible by the development of the Internet.

      Far better, we could all agree, is to have someone build a central power plant and charge you only when you turn on the switch … just like an electric utility.   And that is exactly what the eleven-year-old industry known as Cloud Computing is about.  The massive cost of infrastructure is born by the individual provider.  Their service flows over the Internet.  It is software-as-a-service (SaaS).  And just like your local electrical utility, thousands of customers pay for their software use only as needed.   

      The Harvard economist, Joseph Schumpeter, once described capitalism as the process of “creative destruction.” There is no better example of this than in the rapid growth of Cloud Computing.  Software is the actual “brain” of technology.  Hardware is the necessary, but expensive, infrastructure that runs the software.  And then, of course, there are technical personnel needed for support … which can run from hundreds to thousands of people depending on the size of the organization.  All of which is very expensive.  Especially relative to the time actually needed when you … turn on the switch!

      As you may know, we had a sell on the technology sector in August of 2000.  Over 11 years later Microsoft then $70 is now $26; Cisco Systems then $63 is now $18; Dell then $44 is now $15; Hewlett-Packard then $108 is now $42; and Intel then $129 is now $21!  All are still regarded by the investment community as “blue chips;” and all have been in a secular decline for the past 11 years.   By and large, these companies sell the infrastructure necessary to build new “electrical power plants.” 

      What you may not know is how prescient the stock market can be over a period of time.  In 1904 the relative price strength of railroad industry stocks peaked -much like the above technology stocks- and began a 21-year decline.  However, it was not until 1925 that the railroads’ actual physical traffic started to decline.  But in 1904 construction had begun on the Panama Canal … which would eventually reduce the very profitable transcontinental traffic the industry had enjoyed.  New competition had emerged. The development of Cloud Computing may prove to be this century’s equilvant of a new metaphysical Panama Canal. 

Francis Patrick Boland

3-11-2011