The chief executive of Microsoft is coming to the UK to explain the multi-billion dollar bet that the world’s biggest software company and a poster boy for corporate America is making. Steve Ballmer will bound into a lecture hall at the London School of Economics on Tuesday 5th October in evangelical mood.

The wager? That the era in which companies pay to have software installed on computers is drawing to an end. That services such as sending emails, using documents, managing calendars and updating spreadsheets will no longer be tied to an individual computer but be accessible everywhere via the internet, and that companies will only pay for how much they use. And, finally, that many businesses will no longer bother having their own computer networks at all. Welcome, then, to the world of cloud computing.

The phrase, in which the word cloud is used as a metaphor for the internet, has been generating gigabytes of excitement among technologists, developers and futurologists for the past three years. The best analogy to bust the jargon, say experts, is to consider how homes get their electricity. Few have their own generators on the premises - instead people call on an electricity provider to power up a microwave, turn on a kettle or light as a room as they need to.

In the era of cloud computing, businesses will treat computing services in the same way, sharing networks with other companies and paying only for what they use. Technology watchers say it’s as fundamental a change as the advent of mainframe computers in the 1960s, the development of servers and the arrival of the internet itself.

“The shift to cloud computing is huge. It’s one of those shifts that happen in technology once a decade or so,” said Sarah Friar, an analyst at Goldman Sachs in San Francisco. “It’s not something that anyone of any size can afford to ignore.”

And it’s no longer just the preserve of theory, either. It’s shaping strategy in boardrooms, has fuelled the boom in technology deals this year and will help define the technology industry’s next generation of winners and losers.

All of which explains why Ballmer will be in London talking clouds. Although the lecture hall will be crammed full of students, his real audience will be the vast sweep of businesses in the UK and Europe - both big and small - who are planning their IT budgets for the next few years. For North America has led the way on spending on cloud computing, accounting for 58pc of total spend this year, according to research firm Gartner, compared with 24pc for western Europe.

The numbers Microsoft gives suggests its bet is a real one. By next year, the Seattle-based company plans to be spending 90pc of its annual $9.5bn research and development budget on cloud computing. It already has a range of web-based software products, including Office Web Apps and Windows Azure, and 70pc of the 40,000 of its staff who work on software are in this field.

But sceptics wonder whether Microsoft’s enthusiasm resembles that of the evangelist who is still trying to convince themselves to really believe.

“The prevailing wisdom is that Microsoft has been dragged kicking and screaming into the cloud by Google,” said David Smith, who tracks the industry for Gartner. Google’s web-based drive into Microsoft’s heartland of e-mail and word processing has been aggressive, and the search engine says it can provide it at less than half the price. There’s no doubt that cloud computing’s embrace by Microsoft is not a completely warm one.

Stephen Elop, who ran Microsoft’s division that sells software to businesses until he left last month to head Nokia, has called cloud a “constructive disruption”. The division enjoys a 64pc profit margin and has, in the eyes of critics of the software giant and its Windows operating system, been a licence to print money.

The majority of Wall Street analysts expect those margins will come under pressure as Microsoft provides more lower-cost web-based alternatives and competition increases. But if the company had been a reluctant convert, the camp which still doubt its seriousness is dwindling.

“Historically they were pushed into it but now they are full embracing it,” said Colin Gillis of BGC Partners. “They are a cloud-first company.” Microsoft, which declines to break out the profits it makes from cloud computing, argues that it should generate more revenue as it looks after companies’ networks and provides more support.

Whether you believe Microsoft was pushed or jumped, its decision will prove influential. “Moves by tech bell-weathers including Microsoft - with Azure and Oracle with Fusion Apps - to embrace the cloud suggests that we may be close to the tipping point in the shift,” according to analysts at Bank of America-Merrill Lynch. Those that are leading the adventure into cloud will enjoy tailwinds that have helped catapult cloud to the top of the in-tray of anyone who has decisions to make on IT spending. The global recession and, in the West at least, the fragile recovery is subjecting that spending to greater scrutiny than ever before. The cost of sending information over broadband has dropped, while the explosive growth of smartphones and netbooks has opened up the potential customer base for employees using applications when on the move. Global sales of cloud computing services climbed 21pc to $56.3bn last year, according to Gartner.

The research firm is forecasting that the size of the market will grow to $150bn in 2013. Given the potential size of the prize, it’s unsurprising that the evolving market is a ferociously contested one in Silicon Valley, with some surprising names in it.

There’s Google, which has been in it from the start, but so too has Amazon.com. Best known as a book retailer, Amazon developed web-based computing services as it sought to make more efficient use of its servers to cope with peak demand in the run-up to holidays. Founder and chief executive, Jeff Bezos, has said its web services business could become as large as its retail one.

There’s also a host of fast-growing, smaller companies including SalesForce.com and VMware. Long-established technology company, Oracle, is developing a range of products aimed at businesses, while Hewlett-Packard’s recent $2.35bn takeover battle for 3Par, which provides data storage, shows that the elements like data storage needed for cloud computing are in demand. “The M&A we’ve seen is a direct offshoot [of the growth of cloud computing]. We’ll see more and more deals, both offensive and defensive,” says Friar of Goldman Sachs.

While the worst economic slowdown since the 1930s may be paving the way for radical change, the expansion of cloud computing faces hurdles. It’s not yet generating significant amounts of money for any of the providers. Smith cautions that “there isn’t concrete evidence that this is going to be a large profit machine for many of these companies”.

Perhaps as significantly, customers are twitchy about security. Storing commercially sensitive data and handing over vital business functions such as email to someone else is unlikely to be immediately appealing to many; add in the fact that your data may be stored on the same servers as that of a rival and the anxiety intensifies.

A recent survey by research firm Vanson Bourne, found that 52pc of companies cited security when explaining why they were steering clear of cloud computing. In America, the Government Accountability Office found that the federal government’s increasing reliance on cloud computing was generating risks. The local government in Los Angeles, for example, has requested that all its email stay on Google’s data centres in the US as part of a deal it signed with the search engine.

“We haven’t had a high-profile, public data cloud exposure yet,” says Gillis at BGC Partners. “That hasn’t happened [but] there will be bumps along the road.”

The reasons for chief technology officers to rush to convert are far from clear-cut, particularly when one of the benefits for companies typically touted is a much smaller internal IT department.

None of which has stopped Toby Redshaw, the chief information officer of UK insurer Aviva. He put the network of the FTSE100 company in the cloud because it’s “faster, better and cheaper”.

The last of these three holds particular appeal at the moment. Google and Microsoft are fighting a ferocious battle across America as they compete to offer cheaper services to cash-strapped states.

With spending cuts looming in Britain over the next 12 months, local authorities are also likely to provide a new front in the long-running fight between the two companies.

But it’s not just about the price. Experts say the ability for companies to radically increase or cut their computing power quickly is attractive, and can generate cost savings of its own. Investment banks, for example, make a surge in demands on their networks when option trades are calculated at the end of each quarter, but that paid-for computing capacity typically lies unused the rest of the time.

While companies and governments harbour legitimate concerns about the security of their data, individuals appear less worried. Consumers that are increasingly likely to have a either a Blackberry or an iPhone are playing a pivotal role in prompting companies to offer web-based software and for business customers to consider adopting it.

One leading technology analyst says that this is the first time in which an individual’s technology at home has a good chance of eclipsing that on offer at their workplace. For example, people are already used to downloading web-powered apps or accessing files online through a smartphone.”The consumer has got used to the cloud,” says Gillis of BGC Partners. “A lot of technology has been driven by the consumer and this is no different.”

And it’s something that employees are increasingly coming to expect from the companies they work for. SalesForce.com has developed a tool called Chatter for employees to discuss issues and projects at work that’s designed to mimic the nature of conversations on Facebook. Redshaw from Aviva says that the ability of employees to share files and documents has generated almost 5,000 collaborations across the company.

Ballmer will know that using web-based applications will be second nature to most of his audience on Tuesday. He’ll also know that technology waits for no one, not even for the billionaires at the top of Microsoft. Time will tell whether the world’s biggest software company and its rivals can find their sunnier future up in the clouds.

Source: http://www.telegraph.co.uk/technology/microsoft/8038312/Cloud-computing-will-Microsoft-and-its-rivals-find-a-silver-lining.html