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The Cloud: Profit Engine For Tomorrow

A picture of the world with some numbers.

Cloud computing now accounts for a large amount of business for the big players, especially Amazon, Google and Microsoft

When the presenters of Top Gear, the world's most profitable TV show, were looking for a new home for their irreverent brand of humour and car reviewing, they landed, not at a traditional broadcaster, but with Amazon.

Amazon, that gargantuan e-commerce operation, is also the world's biggest supplier of cloud services, including its video-streaming Prime offering on which the new Jeremy Clarkson-led show will live.

It was not only a coup of new media over old (streaming over broadcast) but further confirmation of where the technology and Internet industry are headed: into the cloud.

Cloud computing now accounts for a large amount of business for the big players, especially Amazon, Google and Microsoft. All three announced solid earnings from their cloud offerings, adding $90 billion to their valuations after just a day of positive news from all three's earnings announcements.

Amazon Web Services grew 78% year on year, with sales of $2 billion in the third quarter. It grew 82% in the second quarter too. But here's the interesting number: income from the cloud division was $521 million, almost as much as the whole North American e-commerce business alone (at $528 million). The key difference is that the operating margins are 25% for the latter, as opposed to 3% for the former. Selling space in the cloud is a lot more profitable than selling things that must be delivered.

It's a wild time for new business models and propositions. If you take a step back, with a five-or 10-year view, you can see huge changes in the way the world is operating.

Once upon a time, you bought software on a disc in a box (first floppy disks, then stiffy disks, then CDs, finally DVDs) for a one-off licence. Now Microsoft and Adobe sell annual subscriptions to their apps, which are downloaded, and new versions are available as soon as changes are made. Both these software firms have similarly evolved what they offer a customer: cloud storage space.

Microsoft gives users 1terabyte of cloud storage with an annual Office 365 subscription, while Adobe provides 100GB of online storage.

The annual fees might be more than the one-off box price was, but the service offering has evolved with the way users have. Dropbox, for example, now integrates easily with other services like Word or for attaching files using Apple's iOS.

It's remarkable to see how cloud-based computing has exploded over the past few years. While Amazon was building up its servers for its online retail business, it realised it could offer some spare capacity to other firms, including an early adopter like Dropbox. This enabled the so-called on-demand business model to take off. Google and others followed (they already offered cloud-based e-mail like Gmail and Hotmail), then supply and demand produced more value for cheaper rates.

Dropbox charges $99/year for 1terabyte of storage. It's a no-brainer for small businesses wanting to back up their data. Just have a secure password.

Now Amazon, which started out as an online bookstore - where its decades-old competitor Barnes & Noble is now defunct - has a video service to compete with Netflix.

Amazon Prime's subscription ($99/year in the US and a few other countries, but not available in SA) was originally a service that offered free two-day physical delivery. Then it started offering movies and TV shows, as Netflix's streaming service showed what the future of entertainment would be.

Less cloud-savvy firms are having a tough time as the computing business evolves. HP has split into two companies, while two other giants of the pre-Internet era are merging, as Dell buys EMC. The original maker of personal computers, IBM, after selling its PC division to Lenovo, has since sold more of its traditional computer assets to the Chinese company (which keeps growing its PC sales). IBM offers the services it pioneered with the on-demand business model. For a modern tech firm to succeed, it needs to be cloudy for there to be a chance of profit.