Cloud computing: A new path for firms

SAN FRANCISCO - Todd Pierce recently put his job on the line.

To meet the computing needs of 16,300 employees and contractors at Genentech Inc., a pioneering biotech company, Pierce took a chance and decided not to rely entirely on business software from Microsoft, IBM or another long-established supplier that would have let Genentech own the technology. Instead, Pierce decided to rent these indispensable products from Google Inc.

The Internet search and advertising leader will run Genentech's e-mail, as well as some word processing, spreadsheet and calendar applications, and it will do it over an online connection - an unconventional approach called "cloud computing."

The decision has turned Genentech into a lab rat for Google and other alternative software services. They are trying to convince skeptical corporate decision makers that cloud computing is more than a pie-in-the-sky concept.

In the process, Google hopes to bleed revenue from Microsoft Corp. and surpass its biggest rival in the race to control the gears of computing.

Genentech's chief executive, Arthur Levinson, sits on Google's board of directors, but Pierce insists those ties didn't propel his leap of faith.

After lengthy internal testing, Pierce became convinced that Google could be trusted to provide critical software programs for Genentech as adeptly as it deciphers Internet search requests to sell ads.

"You don't want to get caught clinging to the past," said Pierce, Genentech's chief information officer. "I feel like we are surfing in front of the wave instead of the back of it."

Cloud computing has already swelled into an estimated $36 billion market this year, representing roughly 13 percent of global software sales. The big question now is whether it can turn into a technology tsunami that sweeps Microsoft and other software industry staples into obsolescence.

Yet for all the potential and hype surrounding cloud computing, breaking old habits won't be easy - particularly with business-software powerhouses Microsoft, IBM Corp., Oracle Corp. and SAP AG all maneuvering to protect their existing, lucrative software franchises while also setting up their own online services to compete with the industry upstarts.

Even Genentech, the biggest U.S. company to buy Google's applications package so far, isn't ready to abandon Microsoft entirely. It's still licensing Microsoft programs like Word for writing documents and Excel for creating spreadsheets.

Typically, companies license their own software, which requires installing programs on disparate computers followed by years of expensive upkeep to keep the technology humming.

In contrast, cloud computing lets companies have someone else run their software remotely for a monthly or annual fee, with users accessing the programs over live Internet connections.

The idea has won over small business owners, government agencies and schools, and now larger companies are taking a closer look, particularly as they look for ways to save money during a brutal recession.

Former Oracle executive Marc Benioff planted the seeds for the cloud computing movement nearly a decade ago when he brazenly declared "the end of software" and started Salesforce.com Inc. to sell subscriptions for a customer management program accessed over the Internet.

Cloud-computing companies began popping up elsewhere, including Philadelphia, where Hovitate L.L.C. developed Vuzit.com with help of Philadelphia's DreamIt Ventures LLC seed fund.

Benioff's San Francisco-based company is now the largest cloud computing service for businesses, with a market value of $4 billion, about 52,000 customers and revenue totaling $1 billion in its past four fiscal quarters.

But Salesforce's income of $37 million during that time translates into a measly $3.70 profit on every $100 in sales. That looks anemic alongside Oracle's net margin of about $24.80 for every $100 in sales in the comparable period.

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. But analysts say its data storage-space businesses 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.

Oracle CEO Larry Ellison, an early investor in Salesforce.com, doubts cloud computing will ever produce big enough profits to finance the hefty investments required to develop products sophisticated enough to satisfy major companies.