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Cold reality has a habit of intruding. The latest fad to feel its chill is the concept of “the cloud”, one embraced by the technology sector. On Monday IBM listed cloud computing as one of its three key initiatives for growth. Cisco, which dominates networking equipment, has been tempted by the prospects to move into making servers. Struggling PC maker Dell, meanwhile, aims to join Amazon in providing cloud-based services.

Nailing down the cloud is difficult because its definition has been expanded to include everything companies wish to sell. But broadly, it entails a business outsourcing technology hardware to a third party and then paying according to usage. In theory, commodity services such as data storage will move into the cloud and then be piped back into the building, as with power and water. Economies of scale will mean vast savings for business and fat returns for those running the clouds.

Outsourcing may be too expensive for most large corporations, however. Research from Mckinsey suggests that moving into the cloud costs much more than staying put. Using Amazon’s web services as a guide, the estimated price per computer per month would be $366 compared with $150 for a typical corporate data centre. The study also puts labour savings at just 10-15 per cent, as Luddite employees still need the help of IT support staff. Instead, the consultants suggest virtualisation – using software to make existing racks of servers run more efficiently – is the best route to saving money.

That may miss the point. Companies are unlikely to outsource entire systems in one go. Instead the cloud allows rapid expansion or cheap testing of new projects. It provides a way to expand without capital investment, and the cost calculation will be different for each organisation. But it does suggest that investors should avoid foggy thinking about the companies vying to provide cloud services.

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