Cloud computing is transforming business operations and has emerged as a major theme in the venture capital world, according to a San Francisco manager.

Cloud computing, which enables businesses to warehouse data at external servers and access “software as a service,” was beginning to transform the business environment, said Michael Kwatinetz and Cameron Lester, general partners at Azure Capital

The emergence of a new technological platform usually resulted in a shake-up among the leading vendors, Kwatinetz said, spurring computing industry juggernauts such as IBM and Microsoft to take note of how cloud computing was reshaping the industry.

It was pressuring these big vendors to undertake a “verticalisation” of their businesses so they could provide comprehensive services to the market, Lester said.

“Large vendors realise that if they don’t line up all of their services in the platform, they will get marginalised,” he said.

The managers expected big technology companies to gain this expertise by acquiring innovations developed by cloud computing entrepreneurs.

These big companies, including Google, pared back their spending on research and development throughout the 2008-09 downturn and now saw acquisitions as the best way of catching up with the latest ideas.

They would use formidable cash warchests to buy these innovations: in December 2010, Microsoft alone had US$44.2 billion on its balance sheet, while Cisco held US$38.9 billion and Google US$35 billion, Azure calculated.

In time, businesses would move their IT operations and into the cloud, Lester predicted. “It will take 20 years to fully flesh itself out. But it’s moving rapidly in some areas, such as the application side where software is a service.”

Kwatinetz likened the change to the wave of outsourcing that swept the computing industry in the 1990s.

“This is the same thing. When you have labour internally, it is probably seven-to-10 times the cost of equipment alone.” In contrast, cloud computing enabled a vendor to spread the costs of labour across their client base, he explained.

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