Cloud Computing

A friend of the blog asked for my observations concerning an article promoting a report that would reveal the names of several companies that could greatly increase in value with what the author viewed as the inevitable rise of cloud computing. It also reveals a weakness in my style of investing. Enjoy.

35 years ago if you wanted a computer for your corporation or university, you would go to IBM and buy something big that came with software from IBM. A really large corporation would hire a room full of geeks to write custom applications for their company. If not you would buy more applications from IBM.

Then the PC revolution occurred. Everybody could buy there own PERSONAL computer and load it with whatever hardware and software they wanted. If you wanted a gaming machine, for example, you could buy a hot processor and a fast graphics card. Individuals could buy word processing software from a dozen different companies. They could even get freeware and shareware for little or nothing. Microsoft took advantage of this once in a century opportunity to develop a classic predatory monopoly. They owned the operating system. By bundling free copies of products like Word and Excel with their Windows operating system they drove better products like Word Perfect and Lotus 123 off the market.

Then the Internet happened. For the last 10 years prophets of doom have been calling for the demise of Microsoft. They really have only two profitable products, Windows and Microsoft Office. What happens to Microsoft if no one needs copies of Windows or Word? What if you could buy a dumb terminal with a keyboard and a mouse for $300 hook it up to an 8 megabyte per second fiber optic cable? No processor from Intel. No hard drive. No mother board. But you still have all the functionality of your PC.

Think Google. You are part of the cloud whenever you use their search engine or access your Gmail account. You don’t use a copy of the Encyclopedia Britannica (in fact it is no longer printed). When you want to know something, you use Goggle. You no longer need Outlook to handle your email on your hard drive. Gmail lives on a Goggle server. All you need to access your email is a simple web browser. Whenever you order something on Amazon, you are part of the cloud. You don’t need Borders.

Why do you need an operating system or a copy of Microsoft Office? There is no reason you could not use Goggle Office in the clouds, if such a thing existed. There is such a thing as Goggle documents. It’s coming. When my employer bought a new accounting system, they actually bought access to SAP’s computers, software, and hard drives. I just access their servers by secure Internet connection. SAP does everything else.

The author sees computing evolving to a system of “clouds” (Google, Amazon, SAP) connected by high speed fiber optic cables to your cheap simple dumb terminal. You pay some kind of low monthly fee to a central, perhaps regulated, provider (utility) rather than having a $1,500 computer with a Microsoft operating system and a copy of Microsoft Office sitting in your study. If you were to buy shares in this provider before they won control of access to the cloud, you would become a very rich man.

An aside:

How about privacy? When a group of large companies can give access about everything I think, do, or say to salesmen or the Government, I get a little nervous.

“New Technology” stocks are notoriously high risk propositions. Ten go bankrupt for every one that hits. Quite frequently they start off at a low price. Then for some reason there is a big buzz about that company or technology. Since the total dollar value of the company is very small, it doesn’t take much new money to double triple or quadruple the price. This can happen literally over night. Then the little company loses the big contract or the big company decides not to buy it. Then the stock drops to zero. This can literally happen in an hour.

If you hit you hit really big. It can be like winning the lottery 1000% or more is possible. In 1996 you could purchase Apple for $6.00 a share. Today that share is worth $600!

You can invest in such things with money you can afford to lose. I do too little of this. I could afford to lose few thousand on a long shot, but I never do it. Because I avoid what I perceive as high risk investments, it is unlikely I will ever make a big score.

Traders love these stocks. They jump in and out over and over. Those who are truly skilled and disciplined can make a great deal of money on a stock that goes nowhere but to bankruptcy court.

Curiously, when it comes to investments, I am very careful to eat my vegetables before I even consider ordering desert. If only I could apply that logic to the dinner table.