How Investment in Cloud Computing Can Be Good, Bad or Ugly

Have you ever thought about how much money it takes to set up a cloud computing service? Behind the end-user convenience of low or no capital investment and pay-per-use agreements, somebody has to finance the infrastructure, the computing power, the networking and the personnel to look after it. Cloud service providers have to take a deep breath and write large checks to put the service in place – or find somebody else who is willing to make the investment. So where (if you were so inclined) should you put your money if you want a good return on investment?

The Money-Makers

Enthusiasm for cloud service providers as an investment opportunity seems to have calmed in recent times. Some emerging companies make it clear that the pot of gold at the end of the rainbow is still far away, if indeed it can ever be reached. Box Inc., the innovative online file sharing and synchronization service provider, recently filed to go public with this statement: “We have a history of cumulative losses, and we do not expect to be profitable for the foreseeable future.” But all is not gloom in the online services world. VoIP is predicted to be one of the best performing industries of this decade for profitability, beating ecommerce and even doing better than non-online stars like biotechnology.

The Ones that Went Belly-Up

A huge factor that makes or breaks new companies is their level of capitalization. If your pockets are deep enough, you can weather any storm. If you lack capital, you will either need to be very smart or very lucky. Otherwise, competitive pressure, overtrading or commercial suffocation will get you. For example, $70 million USD wasn’t enough for cloud services provider Nirvanix to continue operations. The subsequent closure of the company had further ramifications too. IBM was using Nirvanix cloud storage technology and other major players like Dell and HP had sourced cloud resources from Nirvanix too. Finally, and perhaps luckily for those concerned, IBM offered Nirvanix customers a replacement service.

The Scams

Some cloud ventures make a profit, some don’t and some are just out to get your money. Just as many legitimate business models now exist in online versions, so it seems do investment scams. A pyramid scheme that was recently shut down by the US SEC (Securities and Exchange Commission) took money from small investors by promising to double each investment in 100 days thanks to cloud services growth. The entities concerned, operating under the business names of WCM and WCM777, pulled in more than $65 million in one year. The operators of the venture claimed it was a ‘new business model’. But the SEC considered it to be a Ponzi scheme to pay earlier investors with later investors’ money, and make unauthorized expenditures elsewhere (like buying golf courses – yes, really).

How Do You Say Caveat Emptor in Cyber-Speak?

Caveat emptor or “buyer, beware!” is the same online as it is offline. There are profits to be made by those investing in cloud computing companies that succeed. There are also profits to be made on falling stocks by selling first at a higher price and buying back later at a lower one. The moral of the story is always the same however. Make sure you know what you’re doing and don’t invest money that you could not afford to lose!