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On-demand computing's first customer
IBM's latest deal could usher in a new way for companies to look at IT purchasing.
January 27, 2003: 10:48 AM EST
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - I once attended an all-hands meeting at which my then-employer announced plans to build a mammoth new office complex. A colleague sidled up to me and whispered, "When your company gets into real estate, you're doomed."

Sure enough, not long after that announcement, the company's stock nose-dived. The firm is now a shell of its former self.

I mention this anecdote because at the heart of my friend's warning was a wise business maxim: Be wary when companies announce major long-term, high-fixed-cost initiatives.

A standard big-ticket item for companies these days is information technology infrastructure. But the day could be approaching when we look back on major IT purchases the way my erstwhile colleague looked at our company's big real estate plans.

Many firms and tech-watchers believe we're on the cusp of an era in which companies will rely on outsourced, on-demand IT infrastructure instead of purchasing systems outright.

One step closer to reality

On Wednesday, IBM (IBM: Research, Estimates) made that hypothesis a little more real when it announced that Petroleum Geo-Services would become the first customer of Big Blue's nascent on-demand computing division.

PGS uses massive server farms to crunch sonar data in its hunt for oil deposits. The company will outsource to IBM a third of the supercomputing capacity it needs, rather than purchase and manage machines itself.

"PGS has been looking for a more flexible business model which addresses peak computing requirements," PGS's Chris Usher said in a statement.

The move heralds the beginning of what IBM hopes will become a lucrative revenue stream for the company. "Flexible infrastructure will enable companies to control costs so they can begin moving at the speed of the market," says Dave Turek, IBM's vice president for Linux clusters and grid solutions.

Turek and IBM aren't the only ones excited about the development. Both Hewlett-Packard (HPQ: Research, Estimates) and Sun Microsystems (SUNW: Research, Estimates) announced their own on-demand business units late last year. HP's is called Adaptive Infrastructure, and Sun's is N1 (see "Computing to the Nth Degree" from the September 2002 issue of Business 2.0). Neither HP nor Sun has announced any customer contracts for its division.

Is this the beginning or the end?

So is IBM's announcement the beginning of the shift to on-demand computing? Some say absolutely: "We're on the tip of a change on the order of magnitude of [the beginning of] the client server in late '80s," says Frank Gillett, a principal analyst with Forrester Research. "Our estimates are that outsourcing and on-demand computing will cut IT costs [buying and operating] in half over the next five years."

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Pretty big prediction, but with the economy in continued malaise and the specter of market saturation reaching some tech segments, companies will likely jump at the chance to score major cost savings in the back-room data centers.

Part of the current problem is that companies are forced to purchase IT infrastructure to serve peak -- as opposed to average -- demand. Most of the time, however, the equipment isn't experiencing peak demand, so the capacity lies fallow.

Of course, the not-so-well-kept secret of the development is that companies that manufacture large-scale storage and server products (the EMCs (EMC: Research, Estimates) and Ciscos (CSCO: Research, Estimates) of the world) could be in for a rough stretch. "Anyone making hardware is in for a very painful transition," Gillett says. "Equipment is going commodity."

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