Private Clouds: Google, Microsoft, and Facebook Need Not Worry

English: Diagram showing overview of cloud com...

(Photo credit: Wikipedia)

Cloud computing has grown to be one of the most widely-used internet architectures in recent times. Whether you are sending an email to a colleague, or posting your photos on Instagram, cloud computing plays a part. There are a handful of service models in which cloud computing is offered. They include: Software as a Service (SaaS), where companies like Google (NASDAQ:GOOG), Facebook (NASDAQ: FB), and Microsoft (NASDAQ: MSFT) feature. There are others such as Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Network as a Service (NaaS).

SaaS Cloud computing can be deployed in two major ways. There is public and private cloud computing; however, there are others such as community cloud computing and hybrid cloud computing. Public cloud computing is the most widely used, and is equally the cheapest as compared to private cloud computing. However, according to recent reports, private cloud computing may become more popular with time.

Comparison for SaaS
Public cloud Private cloud
Initial cost Typically zero Typically high
Running cost Predictable Unpredictable
Customization Impossible Possible
Privacy No (Host has access to the data) Yes
Single sign-on Impossible Possible
Scaling up Easy while within defined limits Laborious but no limits

Prism spying?

As illustrated above, public cloud computing offers no privacy, which confirms the U.S. National Security Agency’s (NSA) revelation that it tracks non-U.S. citizens’ data via various internet information databases such as Google, Microsoft, and Facebook. This has sparked criticism over the tech giants’ integrity with regard to personal information. All social networking platforms are considered SaaS due to the ability to post and share personal information with friends. Email platforms are also considered SaaS models, which taps into Google and Microsoft’s businesses. Public could computing is the easiest option in terms of cost implications, however it is vulnerable to tracking of user data.

According to a report published by Reuters with regard to the recently concluded Global Technology Summit, data mining and security is, once again, in the spotlight. This comes after it was revealed that the NSA secretly gathers user data from nine major U.S. companies including Microsoft, Facebook, and Google. Furthermore, the NSA not only forced these companies into the Prism Spying Program, but also barred them from disclosing this fact, which humbled their reputations. This casts a huge cloud on the question of integrity, considering that two years ago, Google pulled out of China following reports that the Chinese government hacked into some of the search engine giant’s Gmail accounts.

Opting for private cloud computing

This spying has forced countries like France and Germany to opt for private cloud computing alternatives within their respective borders. According to Reuter’s, when asked whether people will now have an issue when doing business with the U.S., RackSpace Chief Technology Officer, John Engates, said, “It’s something as a country we need to figure out, how to allay some of the fears about data moving through the United States.” RackSpace is an IT hosting company based in San Antonio, Texas.

Could this affect the giant tech companies?

Due to the high costs involved in setting up private computing, I believe that only a few companies would be bold enough to opt out of public cloud computing platforms. I expect that a majority of the individual users will have to accept the situation and go on about their business, but probably with more caution regarding what they pass through the cloud.

However, companies like Facebook, Microsoft, and Google, which have been using user data to target ads, may be affected to some extent. Some people will likely opt for other search engines such as DuckDuckGowhich does not capture user data, while those opting to stay on may eliminate some significant personal data attached to their profiles.

Currently, when you open your Facebook home page, the ads appearing likely mirror your most recent activity on the internet; the same applies to Google. This is because, when you visit a certain webpage while you are still logged to Gmail or Facebook, that data is stored to target ads when you visit Google search or your Facebook home page. Microsoft’s dependence on ad revenues is minimal, with a majority of its income instead coming from software sales and video gaming consoles.

Performance and valuation

Microsoft’s most recent quarterly earnings grew by 18.5%, while revenue was up 17.7%. Facebook’s earnings, on the other hand, grew by 6.8% year-over-year, while revenue increased by 37.8%. This was largely due to the company’s improved traffic monetization. Google, however, reported a 15.8% growth in earnings from the most recent quarter, compared to the same quarter a year ago, while revenue was up 31.2%.

Google’s gross margin of 58% is well below that of Facebook’s 73%, but trumps the social networking giant’s operating margin of 10% with 25%. Microsoft, on the other hand, has a gross margin of 75% and an operating margin of 36%.

Google’s P/E ratio stands at 26.71 times, compared to Microsoft’s 17.53, and Facebook’s 522.24. However, in terms of price to earnings growth ratio (PEG), which factors projected earnings growth rates, Google appears the cheapest among the three companies with a PEG ratio of 1.27 times, compared to Facebook’s 1.45 and Microsoft’s 1.46.

The bottom line

The NSA’s data monitoring activity has definitely cast doubt over the integrity of these three companies, along with others like AOL, and Yahoo!. However, the overall impact on revenue is likely to be insignificant considering that the companies have diversified portfolios, bar Facebook, which largely relies on ad revenue. Google is already getting into the smartphones and tablets business and, therefore, can easily hedge that risk, while Microsoft’s ad revenue has had little impact on overall income. The probable shift to private cloud computing is also likely to be limited due to the high costs involved in setting such a platform.

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