had to estimate (or guesstimate) the computing power and bandwidth needed and purchase the necessary equipment up front. In practice this would lead to two common scenarios:

1) Underutilization: Before that big break comes and millions come swarming to your web site, you’re only using a small fraction of the resources you purchased. The rest of the computing power is sitting idle—wasted dollars.

2) Overutilization: Finally, the big break comes! Unfortunately, it’s bigger than expected and the servers come crashing down under the load. To make up for this, teams scramble to set up more servers and the CEO, under pressure, authorizes the purchase of even more costly equipment. To make things worse, a few days later the surge subsides and the company is left with even more idle servers.

 

If there’s something start-up companies don’t have much of, it’s money, particularly up front. Investors prefer to see results before channeling additional funds to a company. Additionally, experience shows that new companies go through a few iterations of their idea before hitting the jackpot. Under this assumption, what matters is not to succeed cheaply but to fail cheaply so that you have enough cash left for the next round.

Along comes cloud computing. Out goes up-front investment and in comes pay-per-use and elasticity. This elasticity—the ability to scale up as well as down—leaves the two scenarios described above as moot points. Before the big break, you provision the minimal number of required servers in the cloud and pay just for them. When the floods arrive, the cloud enables you to provision as many resources as needed to handle the load, so you pay for what you need but not a penny more. After the surge, you can scale your resources back down.

One of the best-known examples of this is a start-up company called Animoto. Animoto is a web-based service that generates animated videos based on photos and music the user provides. Video generation is a computation-intensive operation, so computing power is of the utmost importance.

At first, Animoto maintained approximately 50 active servers running on Amazon EC2, which was enough to handle the mediocre success they were seeing at the time. Then, one day, its marketing efforts on Facebook bore fruit, the application went viral, and the traffic went through the roof. Over the course of just three days, Animoto scaled up its usage to 3,500 servers. How would this have been feasible, practically or economically, before the age of cloud computing? Following the initial surge, traffic continued to spike up and down for a while. Animoto took advantage of the cloud’s elasticity by scaling up and down as necessary, paying only for what they really had to.

The Animoto story illustrates the tidal change for start-ups. It’s not surprising to see, therefore, that the number of such companies is consistently on the rise. If you like, cloud computing has lowered the price of buying a lottery ticket for the big game that is the startup economy.

It’s become so cheap to take a shot that more and more entrepreneurs are choosing the bootstrap route, starting out on their own dime. When they do seek external investment, they find that investors are forking over less and less in initial funding, out of realization that it now takes less to get a start-up off the ground.

A Bounty of Opportunity

Cloud computing isn’t just an enabler for start-ups—the number of start-ups providing cloud-related services is growing rapidly, too. The colossal change in IT consumption has created a ripe opportunity for small, newly formed companies to outsmart the large, well-established, but slow-to-move incumbents.

The classic opportunity is in SaaS applications at the top of the cloud stack. The existing players are struggling to rework their traditional software offerings into the cloud paradigm. In the meantime, start-ups are infiltrating the market with low-cost, on-demand alternatives. These start-ups are enjoying both sides of the cloud equation: on the one hand the rising need for SaaS and awareness of its validity from consumers; on the other hand the availability of PaaS and IaaS which lower costs and reduce time-to-market. Examples of such organizations include Unfuddle (SaaS-based source control running on the Amazon EC2 IaaS) and FlightCaster (flight delay forcaster running on the Heroku PaaS).

The second major opportunity is down the stack. Although providing IaaS services remains the realm of established businesses, a category of enabling technologies is emerging. Users of IaaS tend to need more than what the provider offers, ranging from management and integration to security and inter-provider mechanisms. The belief among start-ups and venture capitalists alike is that there is a large market for facilitating the migration of big business into the cloud. Examples of such companies include RightScale, Elastra, and my own start-up, Vircado.

The third and final category of start-ups aims to profit from the increased competition between IaaS providers. These providers are in a constant race to widen their portfolio and lower their costs. Start-ups can innovate and be the ones to deliver that sought-after edge, in areas ranging from datacenter automation to virtualization technologies and support management. Examples in this category include Virtensys and ParaScale.

I for one am convinced that beyond the hype and excitement the world of IT is undergoing a very real period of evolution. Cloud computing is not a flash flood: it will be years before its full effect is realized.

Biography

Guy Rosen is co-founder and CEO of Vircado, a startup company in the cloud computing space. He also blogs about cloud computing at JackOfAllClouds.com, where he publishes original research and analysis of the cloud market.

www.acm.org/crossroads
Crossroads