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February 06, 2009

Cloud Computing, Freemium Storage, and the Business Cycle

It's 10 pm, do you know where your kids files are?

When the economy is growing and new technology and applications are explored because they're nifty, rather than significant, a lot of people are geniuses. When the business cycles turns, which is a certainty, all the kicky little ephemeral things are blown away by reality. Fluff dies; very few people are geniuses in hard times.

Think about a concept like FaceBook, Twitter, Digg, Blogger, Flickr, Picasa, Google (gasp!) -- let's talk about a new startup, Vapor. A couple of hungry young classmates start it off as a cool project in the garage. They can do it on a shoestring, because all they've got is shoestrings, and they don't have dependents.

Vapor starts out as a concept, a logo, a web site and a server. They build a Web 2.0 application as a startup, then they get some venture capital (VC) money and begin to ramp up. Users come in because it's free and start contributing to the network. The connections among the users become valuable to them, and Vapor starts to fill a perceived need the audience never knew they had.

Soon, all the people in your (college class, family, soccer league) are on Vapor. Vapor gets its third round of VC funding. They're selling ads on their website, and Tshirts. There's no physical product, the value is in the accumulated network and the presence of so many people.

Vapor gets bought out by MegaCorp (which was the founder's fantasy all along). MegaCorp still lets you store your (pictures, diary, blog, contact info, travel plans) for free, and you can upgrade to premium services (hence freemium) like a concierge travel service, and a database listing the must-see's at the towns you're about to visit.

Businesses will offer these free services, these audacious proposals, because the barriers to entry are so low as to be non-existing, the marginal cost of storing data (photos, calendars, contacts, diaries, itineraries) approaches zero, the potential lifetime value of a customer is enormous, and the value of a relationship with a large group of web-accessing Americans is significant.

In other words, it costs almost nothing to store data, and if you can provide a little free service in a freemium model you might end up with a very valuable database. If it doesn't work you really haven't lost that much money, and you and your startup buddies have had fun, gained experience, and made contacts. There's a small likelihood of fantastic wealth, no risk or downside.

Ah, finally, the word appears: risk. What would happen if you kept a person's diary, and it was very important to somebody (like a publisher) and then your server blew up and you lost the data? That would be a bad thing; it doesn't fit the business plan. So the Vapor lawyer writes Terms of Service (TOS) that says, we're not responsible for any loss of files/data, and we're not responsible for any impact of your files/data. The audience is getting this for free, and they're getting what they've paid for.

But Then the economy goes through a prolonged bad patch. At first a little bit of bad times is a good thing for the sharks; the competitors with good ideas and shaky financing sell their concept cheap, and the sharks snatch them up and increase their odds of MegaCorp buyout Nirvana. But if the tough times get really serious and the funding dries up, all of a sudden the freemium companies can't keep storing your data for free; there is a bill that becomes due. It might not cost much per user but now they've got 30 million users, and they're not hungry youngsters in a garage anymore; they've got a building and whiteboards and Herman Miller chairs and kids, and all their stock options are underwater.

So what does Vapor 2.1 do? Hire an old-school CEO, update the logo, re-organize, fire people, and cut expenses. They calculate their burn rate vs. cash available, and hope that the world changes before the cash is gone. About halfway to the zero-cash date, they start shutting down free services in an attempt to delay the inevitable, in hopes of a savior.

And - I'm sorry to have gone on so long - what does this matter? Isn't this the American way? Why should a Pittsburgher care?

Because your photos are all on Flickr or Picasa, and if they fold you really don't have a copy anymore because your old laptop died in October, and there aren't any more copies of that picture of you giving Big Ben advice in training camp.

The freemium online storage companies (and that's what they are, really, is storage companies - storing your data online) have no obligation to preserve or back up your files. Their financial plan doesn't provide for treating your blog entries like future literature, or treating those photos of your kid and your grandmother like they're important.

So the first question of this post is a play on the old public service announcement: Do you know where your children are? Except today's slogan is: Do you know where your data is? Do you have backup copies of all your information that somebody's storing for free for you? Is there anything out there that you'd hate to lose?

There's a tendency to say, well those social services weren't serious business anyway, they weren't (harrumph!) Business-to-Business B2B endeavors, it'll never effect the important things (business).

The problem is that businesses are moving to Cloud Computing, where your servers aren't in your building or your data center - they're out there (somewhere), being run by an outsourcing vendor. These are rigorous systems with robust capabilities, but they're run as a commodity, on razor-thin margins, in a must-profit world. There have been some problems with the cloud. If some of these enterprise cloud storage outfits go poof, any business that relied upon them will probably follow suit.

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