Why Google's Cloud Is a Pandora's Box
by Andre Mouton, Minyanville staff writer
Google (NASDAQ: GOOG) looks at the cloud and sees the future. It envisions the growth of massive data centers, where consumers and businesses will store their information, run their programs, and develop new software. In this world, everything will be done at the center, and the PC will have dwindled down to little more than an emaciated screen. We will trust our digital lives to servers half a world away, and be rewarded with a network that knows us so intimately, it can cater to our every need.
If the company's vision is ever going to become a reality -- if the cloud is not going to simply complement our PCs and post-PCs, but to a large extent, replace them -- then people will need to feel a lot more trust than they do today. Trust that Google won't abuse its right to do whatever it wants with data stored on its servers, and trust that their information is safe from law enforcers and government seizure. Trust that Internet service providers will provide a reliable, affordable Internet connection, and that this connection won't be throttled, or degraded because of some regulatory conflict like the one over network neutrality.
They'll also need to believe that the cloud is everything it's billed as, and so far, that's not the case. We're told that it's less expensive to move to the cloud, but this is only true in the sense that it's cheaper to rent than to buy. You can purchase a low-end Chromebook for several hundred dollars; but it's essentially a Web browser with a body, so to get any kind of functionality out of it you'll also need to buy a data plan. Mobile connections are pricey -- an iPhone is typically less expensive than the data plan that comes with it -- and if you fly often, or otherwise leave the network, you're stuck paying high rates in whatever local hotspot you find yourself in. Unless you plan to sit at home, staying connected 24/7 is an expensive proposition.
Hidden costs are everywhere in the cloud, and sometimes they aren't monetary. Consumers of 'free' online services, including Facebook (FB) and other social media sites, usually discover that there's no hanging up on salespeople when you're eating at their dinner table. Incremental waits and little inconveniences add up. Enterprise customers find that the cloud makes it easy to outsource IT support, but unless your firm chooses to pay a premium rate, it will be sharing servers and bandwidth, and waiting in line for both. Large file loads can take weeks to back up.
Meanwhile, a lot of cloud content is either loaded with advertisements, or unprofitable. Google Docs is given away for free, so its value to customers can only be guessed at. Google Apps for Business is only available to paying customers, but it's unclear whether Google is getting any kind of margin on its sales. Meanwhile, Salesforce.com (NYSE: CRM) is a venerable cloud institution, able to charge higher rates than its competitors -- and it's still operating in the red. Can we even trust that there's an efficiency here, and not just the sort of growth-at-a-loss that drove so much of the dot-com boom?
There are too many unknowns. In some ways, the cloud is the exact opposite of the computers that Google expects it to replace. When we buy our own machines, the costs are up front. There's no uncertainty about what they will do, how they will treat us, or whether they'll run a side-business selling our personal information. They're secure, private, and predictable -- and a huge inconvenience the moment we have to move data around, or share anything, two things the cloud allows us to do with ease.
These two approaches should be complimentary. There's a synergy here that Microsoft (NASDAQ: MSFT) is trying to exploit with Office 365, a product that, while more expensive than Google's Web apps, actually drives revenue. Apple (NASDAQ: AAPL) embraced connectivity early on with software like the App Store, iTunes, and iChat. Both of these companies believe that the cloud enhances their products, instead of making them obsolete. Android has been successful in smartphones because it's not like Chrome OS, and it didn't try to force a network dependence that would only have run up its customers' phone bills.
Google will be fine even if the cloud fails to live up to its hype. Advertising will continue to drive the company's revenue, as it always has. But for investors who have come to believe that this is the Next Big Thing, the fall to Earth may be a little more painful.
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