Management Information Systems, 14TH ED.

MANAGING THE DIGITAL FIRM

Kenneth C. Laudon ● Jane P. Laudon

Chapter 5: IT Infrastructure and Emerging Technologies

Learning Track 6: Cloud Computing

Introduction

1.0 Cloud Computing: Getting it Straight

2.0 Leading Examples and Services

3.0 Cloud Computing: Related Concepts

4.0 Business Pros and Cons of Cloud Computing

Introduction
Cloud computing is a vision of computing in the 21st Century in which most computer and
IS functionality is located on the Internet rather than on your personal computer, iPhone and
Blackberry, or corporate data center. Put simply, cloud computing is computing on the Internet.
But this simple definition lacks detail and is not very informative even if it works as a grand
summary of cloud computing. In fact, this definition is misleading even though it’s commonplace
in the popular press. Cloud computing is much more than computing on the Internet. Defining
“cloud computing” has been as difficult as defining “Web 2.0.”1

As we see later in this essay, cloud computing is not just a technological juggernaut that inelucta-
bly is rolling over the landscape. It’s also a business product line for the largest computing corpo-
rations in the United States who have a vested interest in ensuring that cloud computing does in
fact become the primary corporate computing model of the 21st Century. Think IBM, HP, Sun,
Oracle, Google, Yahoo, Amazon, and many others who plan to benefit from cloud computing. The
estimated size of this marketplace is rather uncertain, ranging from $80-$160 billion in 2012, to as
much as $1 trillion in 2020.

Cloud computing is fashionable. Cloud computing is also a very imprecise slogan that gets mixed
up with other social values like efficiency, productivity, and “Green computing” which sends some
acolytes into a religious state, while others are skeptical, like Larry Ellison, founder and CEO of
Oracle Computing, who quipped in November 2008:

“The interesting thing about cloud computing is that we’ve redefined cloud computing to
include everything that we already do. I can’t think of anything that isn’t cloud computing
with all of these announcements. The computer industry is the only industry that is more

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fashion-driven than women’s fashion. Maybe I’m an idiot, but I have no idea what anyone is
talking about. What is it? It’s complete gibberish. It’s insane. When is this idiocy going to stop?
Everything is cloud computing these days and we’ve been doing it for years.”

Shortly thereafter, Oracle launched a major cloud computing effort, and placed a prominent link on
its Web page to this new effort.

Cloud computing promises a great deal, and at times these promises may overreach its realistic
capabilities, and underestimate the risks and hence total life cycle costs.

1.0 Cloud Computing: Getting it Straight

Cloud computing is much more than just computing on the Internet-that happened already in the
1990s if not before. The reality is that cloud computing involves a number of different capabilities.

Figure 1-1 provides a graphical and more robust definition of cloud computing. In this view, cloud
computing involves four different capabilities: applications servers, storage servers, platform servic-
es, and management services. Each of these capabilities plays a role in defining cloud computing.
In the marketplace, providers of cloud computing generally offer these four different capabilities.

FIGURE 1-1: Cloud Computing

Applications servers: cloud computing involves making standardized software applications avail-
able to users over the Internet. Rather than purchase software or build a software development
platform, customers can use applications running over the Internet.

Application servers refers to specific server machines dedicated to that function, or multiple
virtual machines, and/or application server software operating on numerous machines as demand
dictates. Cloud computing also offers software developers the ability to create new customized
applications which run on the cloud application servers. These customized applications are built
either on the customers’ computers and then uploaded, or using development tools on the cloud

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application server itself. The leading example of standardized applications running on the cloud is
Salesforce.com which provides customer relationship management software online to thousands of
business firms around the world.

Salesforce.com is an example of Software as a Service (SaaS), a concept which is intimately linked

with cloud computing. . Other examples of SaaS provided by application servers are Google Apps
(office applications on line), Google Sites (a online collaborative environment), and similar services
offered by MicrosoftLive for small businesses. Other successful applications can be found easily on
the Internet for video conferencing, , IT service management, accounting, IT security, web analyt-
ics, web content management, human resources, and e-mail.

Examples of entire application development platforms on the Web include Amazon’s Elastic
Computer Cloud (EC2) which provides a virtual programming environment; Google App Engine;
Microsoft Live Mesh; and Sun network GRID. While each of these provide “platform as a service,”
they offer different services and capabilities.

In cloud computing, thousands and even hundreds of thousands of computers are located in cloud
data centers. The largest application server installation is arguably Google which has an estimated
500,000 simple PC like blade servers to perform billions of searches a day.

There are several advantages for using cloud applications:

◆ Reduces the need for customers to purchase computers to run applications, along with the tele-
communications and staff required.
◆ Eliminates software maintenance, upgrades and support
◆ Provides inexpensive scalability as businesses grow (or shrink)
◆ Enables “on demand computing” where customers are charged only for the capacity they use.
◆ Reduces the initial cost of purchasing software applications
◆ The major disadvantages of cloud applications are:
◆ Reduced control by the firm over the functionality of the software
◆ Introduces dependency on an external firm
◆ Poses security risks for truly proprietary corporate information
◆ Introduces a new recurring expense beyond the control of the customer
◆ Exposes the firm to future switching costs if the relationship does not work out

Storage Servers: Applications need data, usually lots of data. In the past, firm data was stored
locally on large disk drives, where it was used to support local application servers. With cloud
computing, the location of data changes from the corporate hard drives to Internet storage servers
located in very large, energy efficient data centers available on the Internet. One of the more
successful cloud storage services is provided by Amazon’s S3 (Simple Storage Service). S3 is a part
of Amazon’s larger cloud service Elastic Compute Cloud (EC2). S3 provides a simple web services
interface that can be used to store and retrieve any amount of data, at any time, from anywhere on
the Web. It gives any developer access to the same highly scalable, reliable, fast, inexpensive data

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storage infrastructure that Amazon uses to run its own global network of web sites. The service
aims to maximize benefits of scale and to pass those benefits on to developers.

Costs for large scale data storage start at 15 cents per gigabyte for the first 50 terrabytes.
Telecommunications costs start at 10 cents per gigabyte in, and 17 cents per gigabyte out. The
cost of storing 1 gigabyte of information in a typical corporate storage area network (a managed
array of hard drives) is about $2.00! One user of Amazon S3 is NASDAQ (the National Association
of Securities Dealers Automated Quotations) for its Market Replay application. Market Replay
records every transaction price on the New York Stock Exchange and NASDAQ, along with ten
minutes of transaction data on the stock. The purpose is to ensure to regulators that NASDAQ
trades were executed at the best possible market price in a given environment. This involves track-
ing trillions of transactions. To store all this information NASDAQ uses Amazon’s S3, uploading
30 to 80 gigabytes a day.

Infrastructure: In order to provide application and storage services online, cloud providers
construct elaborate and large data centers-the infrastructure of cloud computing. This involves
acquiring physical buildings for its computers, securing sufficient power resources for the comput-
ers, establishing fail-safe telecommunications links with the Internet, and providing data security
services. Data centers used to be located in the same physical building as corporate headquarters,
or in an adjacent community or state. This was necessitated by the expense of move large volumes
of data over long distances, security issues and beliefs, and strategic considerations. Being “close
by” is still a powerful phenomenon for many large institutions and firms, but the Internet has made
moving data over long distances nearly as inexpensive as moving data to a corporate basement data
center or across town.

One of the largest cloud computing infrastructures to date is supplied by IBM’s Blue Cloud initia-
tive. By 2008 IBM announced it was building “cloud computing services” into nine IBM data
centers around the globe, each costing about $350 million each. One data center in Singapore was
specifically designed to be a cloud computing center. What’s inside a Blue Cloud data center? Not
much more than what’s inside any IBM corporate data center. Thousands of Linux based blade
servers designed to operate with minimal power and air conditioning requirements; some of IBMs
new Series 7 mainframe computers that themselves run thousands of instances of various operat-
ing systems. Using proprietary software, these computers can be dynamically linked together for
periods of time to boost computing power to trillions of computations per second (compared to a
single PC capable of 3 billion instructions per second). Because these capabilities already exist in
the data centers, it’s difficult to understand “what’s new” in the Blue Cloud initiative. What is new
however is offering these services on a “demand computing” basis, and charging customers for
actual capacity and service used rather than for a fi xed price. Instead of buying software licenses,
for instance, customers can be charged on the amount of data or time used to process data with
the software.

To ensure the operation and survival of the hardware, air conditioning systems, electrical distri-
bution and fail safe backup systems, fire protection, and physical security round out the main

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components in a cloud data center. Air conditioning and computer power consumption are the
leading cost factors in operating a cloud data center. IBM has taken a number of innovative steps
to reduce the power consumption of its computers by 40% when compared to standard, stand alone
servers, and reduced the floor space required by 50%. Cloud computing is “green computing,” and
much more sparing of electricity than millions of PCs on corporate desktops.

The technologies being offered to the community by IBM’s Blue Cloud centers include IBM
Rational software development tools, WebSphere Application Server software and DB2 data-
base software running on IBM System x, System p and BladeCenter servers. IBM Tivoli systems
management software will manage the cloud computing environment. In other words, the centers
built by the large “Big Iron” manufacturers are typically populated by their proprietary software
solutions even if these solutions run on Linux servers using “open source” operating systems.

Management Services Cloud computing is about more than hardware, software and physical
buildings. It’s about management of all of these elements, and in addition, other value added servic-
es that roughly fit under the rubric of “management services.” For instance, a group of managers
and lawyers will be needed to arrive at service level agreements with customers; another group of
managers will focus on the maintenance and repair of the cloud components.

Managers of data centers provide to their customers the following services:

◆ System optimization
◆ Consulting services
◆ Hardware and software maintenance
◆ Continuity planning
◆ Physical floor management and planning
◆ Security management
◆ Infrastructure support (electrical and air conditioning)
◆ Pricing
◆ Accounting

An IBM Blue Cloud data center employs over 300 onsite employees, in addition to hundreds of off-
site employees, who are required to administer the center and interact with clients.

2.0 Leading Examples and Services

Cloud computing is in its infancy. It tends to leverage the resources of very large hardware manu-
facturers, but even service oriented firms like Amazon have the potential to play a large role in
cloud computing. Amazon’s example may open the door to even more cloud services being provid-
ed by very large firms with excess computing capacity on their hands.

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Table 1-1 describes some of the large vendors providing cloud computing services today.

TABLE 1-1 Cloud Computing Vendors and Services

Functional Area Business Process

Amazon Elastic Computer Broadly based cloud environment providing computing and storage; various
(EC2 and S3) Web APIs; AMI (Amazon machine image) programming environment. Utilizes
Amazon’s spare computing capacity required by its retail operations.
IBM Blue Cloud Extensive cloud services from computing and storage to proprietary software
Google App Engine and Python programming environment for developing new applications develop-
Google Apps ment platform; data storage; office productivity applications SaaS. No value
added services.
Microsoft Live Mesh Small business storage, and Web based applications for collaboration; no value
added services.
Sun Network.com Broadly based cloud environment providing computing and storage; various
Web APIs.
Oracle Cloud Products Oracle Database 11G, Oracle Fusion Middleware, and Oracle Enterprise
Manager available to run on the Amazon EC2 and S3 platforms.
Mozy One of a large number of online backup and file transfer services available to
individuals for free, or a nominal fee. Others include Carbonite, Xdrive, and
ATT’s Data Vault.

3.0 Cloud Computing: Related Concepts

There were many precursors to cloud computing that at times become confused with cloud
computing. Table 1-2 describes some of these other concepts and phenomenon.

TABLE 1-2 Cloud Computing: related Concepts

Functional Area Business Process

Cluster computing Computers linked together generally in a local area net-
work (same building) to provide redundancy, and dedi-
cated to a small number of tasks.
Grid computing Linking together of many remote computers and using
their spare capacity to solve large computational prob-
lems, or to process bits and pieces of larger programs.
Utility computing The provision of computing services over a network to
remote customers much like an electrical or telephone
utility works. This would include billing users based on
the amount of service consumed, plus additional charges
to pay for the infrastructure. First proposed by Leonard
Kleinrock in 1969.

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4.0 Business Pros and Cons of Cloud Computing

Cloud computing offers business firms the potential for significant cost reductions for both soft-
ware and hardware. Software should be less costly because its cost can be spread efficiently over
a large number of users. Hardware should be less expensive because large data centers can keep
their computers operating at much higher capacity levels than a single firm. The single firm is no
longer required to purchase enough computing power for its peak loads, and instead it can count
on the cloud center to handle whatever peak loads come along. From a cost and flexibility perspec-
tive, cloud computing makes a lot of sense.

On the other hand, firms tend to hang on to their mission critical and “strategic” applications
which form the foundation of the business. The reason is that most managers are still wary about
Internet cloud security, both the telecommunications links and the stored data at cloud centers.
What happens if the cloud center goes down? What happens if the communication links are
severed? For instance, on February 15, 2008, Amazons S3 Cloud Storage system went down for
three hours. Many small and medium businesses were knocked out of service. This highlights one
of cloud computing’s biggest risks and nightmares. The question is: will the track record of cloud
computing be as good as the track record of most corporate data centers (or just as bad)?

For this reason, large corporations have so far only off-loaded their non-critical and non-strategic
applications to the cloud. Other managers are concerned about becoming a “captive” of proprie-
tary software offered by some vendors such as IBM and HP. What happens if you want to switch
to another provider?

In the years ahead, confidence in Internet security will probably grow, and firms will feel more
confident about placing more mission critical systems on the cloud. However, some obstacles-like
vendor dependency-- will not be so easily overcome. Firms will develop mixed strategies. They
will retain their strategic defining systems and their mission critical systems, while offloading to
the Cloud more routine administrative systems. The cost of buying excess capacity will be consid-
ered far smaller than the risk of a cloud failure. Small and medium sized businesses may well be
the largest users and benefactors of cloud computing. They are sufficiently small that they have no
choice but to build scale by using cloud computing facilities.

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Copyright © 2015 Kenneth Laudon and Jane Laudon.
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