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Computing In The Cloud
Tiny Firms Offer Big Computing Services
Andy Greenberg, 03.26.08, 6:00 AM ET

Dave Durkee believes in the "Big Switch." Like tech pundit Nick Carr, who coined that term in his recent book of the same name, Durkee, the CEO of utility computing company Enki, argues that information technology will eventually move out of corporations' server rooms and into massive, shared facilities, where servers and storage can be hosted more efficiently and piped out to customers. Instead of investing in expensive IT infrastructure, companies will take advantage of computing as a utility, paying their IT bills the same way they pay for water and electricity.

But the Big Switch, as Durkee will attest, is starting small. In August 2006, Durkee mortgaged his home, and he and a partner invested their retirement funds to start Enki, a tiny firm in Mountain View, Calif. Today, Enki has fewer than ten employees and about eighty servers. But the company now powers the IT operations of about twenty customers, some much bigger, which pay Enki monthly fees to store and process their data. Enki's revenue, as a result, has doubled every six months, Durkee says.

"We found a way to give a high quality of service with a low staffing count," says Durkee. "We let customers focus on running their business, instead of that very technical, risky and expensive project called a data center."

Enki may not be able to leverage millions of servers like big companies including Sun Microsystems (nasdaq: JAVA - news - people ), Amazon (nasdaq: AMZN - news - people ), or IBM (nyse: IBM - news - people ), which are also offering utility, or "cloud," computing services. When those companies fully open their massive data centers to the outside world, little players will likely get swept away, argues Nick Carr, whose book on utility computing was published in January. (See: "When Google Grows Up")

But for now, those larger companies are treating utility computing services as side projects or experiments. By contrast, smaller firms like Enki are betting their livelihoods on the emerging opportunity--and, in some cases, outperforming their Goliath competitors. The first wave of utility computing customers, Carr says, will be small companies trying to avoid big IT investments, whose computing needs can be easily served by smaller firms.

That's certainly true for Joyent, a 22-person firm located in Sausalito, Calif., that is running the IT operations of more than 10,000 customers. Most of Joyent's customers are small Web companies, including many Facebook applications developers. But Major League Baseball's Web site, MLB.com, also rents server space from Joyent, scaling up its use during baseball season and scaling it down in the autumn.

Another start-up, Plano, Texas-based Layered Technologies, rents out customized servers by the month to about 4,500 clients. The company hosts a grid of servers that it divides up and rents to clients in packages designed especially to satisfy their hardware needs. Clients can choose to add hardware or subtract machines, like an extra server or storage device, in seconds. Layered Technologies completed its first round of publicly announced funding in mid-March.

"Utility computing is one of those disruptive technologies that larger players won't be interested in until it gets big," says Carr. "That means smaller players can server the first adopters. The challenge will be when the IBMs, the HPs, and the Suns start to come in to dominate the market."

But don't count out the little guys, insists Layered's chief marketing officer, John Pozadzides. Layered's customers want more than cheap, generic computing power, he contends. As a smaller firm, Layered can customize and scale the resources it rents to every customer, Pozadzides says, whether it's a start-up search engine or a software-as-service sales and inventory company.

A different sort of player hoping to squeeze into the utility computing space is 3tera, in Aliso Viejo, Calif. 3tera offers a program that helps utility computing companies divvy up their hardware resources among their customers. Both Enki and Layered use 3tera's program, known as AppLogic, to create the virtual data centers that they host for their clients; the software lets their customers expand or contract the resources they need in seconds, literally by dragging and dropping components on a computer screen.

"Today, if you want to add a new server, many sets of hands are involved," says Bert Armijo, 3tera's vice president of product management. "If you have the ability to instantly provision what you need, that's when it really becomes a utility."

3tera, which predicts it will become profitable in the first half of 2008, is a start-up worth watching, says Forrester Research analyst James Staten. The company's "arms dealer" strategy, he says, will allow it to profit no matter who eventually comes to dominate utility computing.

As for the other small fry, Staten says, it is too early to pick out potential winners as the industry evolves. But he's confident that by the time larger customers start to look at utility computing as an attractive option, a company like Enki or Joyent may have grown into a real competitor.

"This is classic disruptive innovation, where the mainstream dismisses the product and small companies have time to create a real differentiated value," says Staten. "When this technology becomes really robust five to seven years from now, the doubters may not be able to compete anymore."

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