The Microsoft that produced the Windows-Office monopoly let its products get fat, dumb and happy. The Microsoft that must contend with the Oracle database juggernaut puts out a pretty good database. That’s why the sudden influx of new public cloud riches exemplified by this week’s official launch of the Google Compute Engine, coming a few weeks after Microsoft launched its Windows Azure IaaS options, may be tough on the competitors but could be very good for smart IT consumers.

Look for price cuts to continue, along with a flow of new services, and better APIs to access those services.

While I haven’t parsed the instance-by-instance price comparison between GCE and AWS, Google’s decision to sell compute instances in sub-hour increments could lead to cost savings vs. Amazon, which prices by the full hour. Don’t be surprised if Amazon responds, however.

We’ve already seen several price skirmishes in cloud including five or six price cuts in cloud storage in the span of a few weeks late last year between Google, AWS and Microsoft. Heck, even Rackspace, which touts its fanatical support rather than low prices, got into the act a little bit later.

Look for this sort of one-upsmanship (one-downsmanship?) to continue as these extremely well-funded and highly motivated competitors angle to get your workloads on their respective clouds. For the discerning IT buyer, whether she’s at a startup or a Fortune 100 company, that is only good news.

Photo courtesy of  Flickr user Official U.S. Navy Imagery

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But there is nagging worry, sparked anew by Rackspace’s laggard Q1 cloud growth, that the appetite for cloud services may not be unlimited after all. For its first quarter ending March 31, Rackspacelogged $91 million in public cloud revenue, up 4 percent sequentially and 40 percent year over year. It is the quarter-over-quarter number that has people spooked; given that Rackspace has been touting its new OpenStack public cloud, folks expected much better numbers.

To be fair there are nuances about the Rackspace quarter to be examined. First, it blamed some of the inertia on price cuts on some services during the quarter. And the newer OpenStack-based public cloud business was up 75 percent sequentially, CEO Lanham Napier told analysts on the company earnings call Thursday night. The problem is demand for the older Slicehost-based cloud technology evaporated and bookings for the new cloud haven’t taken up the slack. New customers are being directed to the OpenStack option.

RAX data by YCharts

There are Rackspace-specific issues but there are more macro concerns, which I’ll get to in a minute.

Bryan McGrath, Rackspace’s director of finance, acknowledged that there may be vendor consolidation, just as there has been in other areas when technology matures.

“There are lots of versions of Linux out there but only a few are widely adopted,” he noted. But his point is that even with consolidation, Rackspace is well positioned to prevail. After all, he noted, he company was able to build a $300 million business on its older cloud technology, which was admittedly less scalable and capable than giant Amazon Web Services.

“People bought that because of our support and service. Now we have a new, much better cloud based on OpenStack with new features and functions,” he said. “We’ll marry that with our dedicated business to offer customers what they need.”

Now for the macro cloud problem

Of perhaps greater concern is that so many vendors are jumping into the cloud services game that there may not be enough customers to support them all. IBM will doubtless sell its OpenStack options as they come online to its typical Fortune 500 accounts, the biggest of the big companies. That leaves other smaller — yet still big companies — with OpenStack options from Hewlett-Packard, Red Hat, Rackspace and perhaps Dell, Cloudscaling, Nebula and other players going forward. Or they’ll go with CloudStack or Eucalyptus or OpenNebula clouds.

Telcos, carriers and hosting companies are gearing up their own cloud services based on their own or partnering with aforementioned OpenStack or Joyent. Microsoft just last month came online with its Azure IaaS option, which will probably get traction among the zillions of Windows shops. While Google Compute Engine, which will probably become generally available next week at Google I/O, is not really seen as a business class public cloud, you’d be foolish to rule it out completely. And then there is the big, bad incumbent, AWS, which continues to churn out new services, price cuts and service options by the week.

No matter what we make of Rackspace’s quarter, if you thought the cloud wars were hot before, you better gear up for the next round. The big question is whether there really is enough cloud work to support all these players going forward.

My best bet? Nope.

Amazon.com CTO Werner Vogels, Rackspace President Lew Moorman and other cloud luminaries will no doubt map out this competitive landscape at GigaOM’s Structure event next month.

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According to the mail (and subsequent blog post):

“It is with genuine sadness that we inform you that Xeround’s service will be terminated in the course of the coming weeks, across all of our currently active data centers.”

Xeround’s free and paid service options run on Amazon Web Services; Rackspace, AppFog, Heroku and HP Cloud. The company could not be reached for comment but rivals are circling — ClearDB and Cloudant posted tweets to woo Xeround users.

This news has to be sobering given the number of cloud-based database services dotting the landscape. The company had raised more than $30 million in funding starting in 2005.  Xeround investors include Benchmark Capital, Giza Venture Capital, Ignition Partners and Trilogy Partnership.

This story was updated at 4:38 a.m. PST to add the closing date of the paid service, a link to the Xeround blog post, and information on Xeround funding and investors.

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Scalr is clearly a big fan, but even if you don’t buy its rather impressive report card, there are other reasons that Google Compute Engine should be considered the biggest potential rival to AWS.

Google knows from scale

Even Google bashers will concede that the company understands massive scale. It has the data center fire power; it has the software tools to harness that power; and it has a deep engineering bench that includes several key hires from — you guessed it — AWS. A quick LinkedIn search shows some of these hires, but omits many. One of those is Sunil James, who worked on the AWS Virtual Private Cloud and Direct Connect and who now heads up networking services and technologies for the Google Cloud Platform.

Multi-cloud strategies demand a back-up cloud

As big and great as AWS is, most existing and potential business customers will not lock into a single cloud provider. They are still bruised from the current generation of vendor lock in. On the other hand, they can’t afford to support too many. “You can only make so many bets, and it’s clear that Google is in this public cloud game to stay,” said one vendor exec who would not be named because his company does business with Amazon.

Companies who made early bets on GCE are Cloudscaling, the OpenStack player which said last fall it will support both the AWS and GCE APIs, and RightScale, a pioneer in cloud management and monitoring that signed up as GCE’s first reseller in February.

Google is serious about GCE

Let’s face it: Google does have a bit of a credibility problem for launching, then deep-sixing services. (Hello, er, goodbye Google Reader.) But no one can seriously doubt that GCE is a priority.

“This is no skunkworks. This is not some little company they acquired. There’s a big team on the engineering side and if you look at the data center footprint, the fiber, the tech expertise, the internal platform and tools, they are serious about this,” said the vendor exec.

Dan Belcher, co-founder of Stackdriver, a Boston startup, said the time is ripe for an AWS contender to surface. The industry, he said, appears to be waiting for someone — Google? Rackspace? Someone else? to challenge AWS.

“Clearly, Google’s strategy is to differentiate on performance (overall and consistency thereof,)” he said via email. “Our first test suggests that they are delivering on that promise … so far,” he noted. He also pointed out that GCE’s admin console UI needs work and that less than a year in, there are limited services and features compared to AWS. A new Stackdriver blog details its first impressions of GCE.

The big question is how performance will hold up when the service actually leaves beta and opens up to the real world. There are reportedly tens of thousands of users queued up and ready to jump in when that happens. “Sure it feels fast with my six instances in limited preview. How will it feel when I am sharing with the rest of the world? And what has Google done to limit the host, network and API contention that plague large AWS customers?” Belcher asked.

Lack of legacy baggage helps GCE

Microsoft Windows Azure is paying the price now for Microsoft’s huge installed base of Windows and .NET legacy applications. While it’s done a good job incorporating support for open-source technologies under the Azure umbrella, that support is not on par with Windows, at least when you ask developers outside the .NET world.  Microsoft remains”weighted down by its Windows and Office mentality,” said one vendor who weighed supporting Azure but decided against it. “There are aspects of Azure that are technically superior but then their APIs are atrocious,” he said.

On the other hand …

Skeptics will always wonder if Google’s heart is in anything other than internet search and advertising. And, Google, like AWS is not particularly known for working well with others in the partner community.

The other issue is that while Google Apps has gained traction in business accounts — largely because it’s so much cheaper than Microsoft Office —  one long-time Google watcher wonders if it will ever “get its enterprise act together.”  In his view, Google Enterprise Search appliance never got traction so Google has to prove its credibility outside internet search.

Going forward, Google will also have to offer a more comprehensive menu of services. And, most importantly, it will have to bring more enterprise workloads on board so all of those companies looking for an AWS backup (or alternative) can really put GCE through its paces.

We will be talking about public and private cloud adoption, gating factors to that adoption, and other hot-button topics at GigaOM Structure in San Francisco in June.

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VMware CEO Pat Gelsinger

This “VMware vCloud Hybrid Service,” to be run from partner data centers and sold by VMware’s channel but managed by VMware, is slated to come online later this year. VMware pitches it as a way for the company’s 480,000 customers “to reap the benefits of the public cloud without changing their existing applications while using a common management, orchestration, networking and security model.”

But VMware faces a raft of challenges.

Too little too late?

First of all, many of those VMware customers have already tested out other cloud offerings — Amazon Web Services, or a third party service provider, MSP or hosting company, they’re already in the cloud in some way. AWS, for better or worse, has set the bar high when it comes to pay-as-you-go services for developers and higher-level managed services for other constituencies in the enterprise. Even solid VMware shops are testing out alternatives for different use cases, as we learned in last week’s big PayPal does/doesn’t dump VMware for OpenStack kerfuffle.

Fractious partner relationships

Second, VMware’s existing cloud partners — including big service providers and telcos offer VMware’s vCloud Director as an option but several of those partners, speaking privately, aren’t wild about it. They say it’s under-featured and expensive. And, nearly all of them offer other — less costly — options to vCloud Director including OpenStack.

The fact that VMware will pick certain service providers over others to host this cloud means it will tick off others.

“Nearly all of the service providers were already hedging on vCloud Director because of cost issues and now all those that weren’t already hedging are aggressively moving in that direction,” said an exec with one vCloud Director partner who requested anonymity for obvious reasons.

Forrester cloud analyst James Staten agreed that VMware stepped on “xSP” partner toes, but said it had no choice.  ”None of its partners — not even the vCloud Data Center partners —  were really offering the full vCloud Director cloud experience as VMware views it. And it felt it needed to do this to really help educate buyers on the full capabilities of vCloud Director,” he said via email.

Playing catchup is hard, especially for a leader

The bigger problem, is that VMware is behind the curve when it comes to full pay-as-you-go cloud capabilities. And the claim that customers running vSphere internally and vCloud Director in the cloud get fully interoperable elastic cloud services across sites,  is, untrue, said Carl Brooks,  internet infrastructure services analyst at The 451 Group.

“If you run vSphere in house and vCloud outside, you can get very basic capabilities — virtual storage and virtual servers– but that’s very little compared to what you get from any other hoster these days,” Brooks said. With vCloud director, “it’s like VMware is giving you a 1978 Pinto and saying it’s a Formula 1 car.”

VMware would argue that the level and type of services that a third party service provider offers depends on the service provider itself, not on VMware, which supplies the software stack and tools. That’s one big reason that VMware will manage and run this new hybrid cloud, but proof will be in the pudding.

And VMware’s biggest problem — the perception that its software is a proprietary and expensive — remains unchanged.

Banking on the brand

But, VMware has its advantages. For one thing, there are all those customers. If it can stem defections to OpenStack or other cloud technologies and convince enterprise customers that its cloud is a more secure but also cost competitive alternative to AWS, it has a shot. VMware also spun off a bunch of projects to the Pivotal Initiative so it can better focus on its priorities — although Pivotal is also focusing on cloud initiatives. It’s not clear — at least to me — how Pivotal’s work will or will not complement what VMware itself is doing with its hew hybrid public cloud.

The problem there is AWS has a 7-year head start and rolls out new services (and price cuts) practically every week. And it’s getting more enterprise savvy and is showing more interest in co-existence with private clouds preferred by regulation-constrained industries.

OpenStack remains a wild card. VMware CEO Pat Gelsinger was careful to talk about the company’s commitment to heterogeneous environments when he outlined the new strategy. And, after all, VMware is a member of OpenStack now, a development that caused a lot of head scratching.  One big reason for OpenStack momentum is that VMware’s rivals and enterprise customers alike have vested interest in preventing VMware from parlaying its on-site virtualization dominance into the cloud.

Staten maintains that VMware’s hybrid-public cloud is trying to be bold without being too bold. ”Any way you look at this, it seems like a half-hearted effort which means its likelihood of success is low,” Staten said.

Feature photo courtesy of Flickr user fontplaydotcom

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This may be one of the industry’s worst kept secrets, with stories surfacing about the plan last July on GigaOM and then in August in CRN. But it is nonetheless important. VMware will make all the relevant code available to its existing  VSPP partners, Gelsinger told analysts at a New York investor event held by VMware, parent company EMC and the Pivotal Initiative spinoff. That may reassure some of those service providers and VARs who were already implementing vCloud Director in data centers of their own.

VMware also said former Savvis exec Bill Fathers will head up this Hybrid Cloud Services push. Savvis, now part of CenturyLink, is a big VMware service provider partner.

The selling point is that vCloud Director running customers’ private clouds  will interoperate will with vCloud running in public clouds and will facilitate work loads moving back and forth easily. That’s pretty much been VMware’s story for years. The rather large difference now is that VMware itself will be hosting and running a rather large public cloud instead of relying on big service providers to do so on its behalf.  Clearly VMware has Amazon and its public cloud might on the brain, as evidenced by VMware’s recent  ”Amazon will kill us all” comments .

Gelsinger said all the vCloud Hybrid intellectual property will be made available to the company’ s partners — which may reassure them that VMware will not build out its own Amazon-like public cloud infrastructure. Time will tell. VMware CFO Jonathan Chadwick tried  to lay that fear to rest. “We will leverage other people’s infrastructure” rather than building out VMware’s own data centers, he said.

Forrester cloud analyst James Staten in a research note wrote:

“VMware said its public cloud will be aimed at its existing customer base and sold through its existing VAR and SI [system integrator] channel. This explains CEO Gelsinger’s strong comments from last month’s Partner Exchange – it wasn’t public clouds he was worried about but non-VMware public clouds. But for this channel fulfillment strategy to come true, its partners will have to get with the cloud program too and like the [infrastructure and operations] clients they serve, many don’t see more revenue at the end of the public cloud rainbow.”

Staten makes a point. It’s also by no means clear that VMware’s vCloud push is gaining traction. Most service providers that offer it also offer other, non-VMware options. One big hurdle for vCloud adoption issue is price. One IT consultant summed it up last week:

“I did a cost analysis for a big [integrator] last week – VMware is $6 per GB ram per month – adds about 30% in some cases to price – and do you think customers care what the hypervisor is? I can’t see how VMware’s core revenue maintains in any shape or form.”

This story was updated at 1:20 p.m. PST with more information about VMware’s new Hybrid vCloud services division

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In a new report, the big researcher estimates that the public cloud market overall will grow 18.5 percent, to $131 billion, in 2017 from $111 billion in 2012. Under this broad umbrella term for public cloud services, Gartner includes the usual suspects — Infrastructure as a Service (IaaS) a la Amazon and the growing crowd of OpenStack-based public cloud providers.

The public cloud IaaS and file and storage represents the fastest growing part of public cloud services, growing 42.4 percent in 2012 alone to $6.1 billion. With growth accelerating to 47.3 percent, it’s expected to hit $9 billion in 2013. Gartner research director Ed Anderson said that’s happening as more companies go beyond the usual development and test scenarios to more for-real production deployments — a topic we’ll doubtless touch on at GigaOM’s Structure: Data event in New York March 20-21.

Gartner also includes “cloud-based advertising services” as another hot sub-category. I assume this includes such offerings as Akamai’s new ad integration service plus, perhaps, SaaS based ad and marketing tools a la Salesforce.com. I’ve asked Gartner for some clarification on this so stay tuned. Update: Gartner defines Cloud advertising as “processes that support the selection, transaction, and delivery of advertising and ad-related data where content and price are determined at the time of end-user access, usually by an auction mechanism that matches bidders with impressions as they become available.” Relevant vendors include AOL, Apple, AppNexus, Baidu, Facebook, Google, Microsoft, OpenX and Yahoo.

The report also shows geographic differences persisting. According to Anderson:

“Although forecast growth is generally high across all regions, the adoption of cloud services varies significantly by country. Providers should not assume that a generic strategy applied to specific countries or regions of the world will produce the same outcome when applied to other countries, even countries with similar market characteristics … Local economic factors, regulatory issues, the local political climate, the diverse landscape of global and local providers, including noncloud providers, and other country-specific factors ensure a unique marketplace in each country and region.”

North America is the most enthusiastic adopter of public cloud services, with Gartner expecting it to account for 59 percent of all new spending in the overall category from now until 2016. Despite local challenges, Western Europe is projected to remain number 2, with public cloud expected to account for 24 percent of spending in the category. But, as expected, the highest growth rates will be seen in emerging markets in Asia (especially in Indonesia and India), China and Latin America.

So now comes the hard part: Remembering to come back and re-check this prediction in three or four years.

This story was updated at 5:05 a.m. PDT to include Gartner’s definition of cloud-based advertising services.

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Other OpenStack distributions have been available for a while but Morphlabs claims that its offering can provide a secure, multi-tenant infrastructure that these companies can pay for on a subscription basis, and that will provide them with the billing capabilities, credit card validation and processing that they need, said Yoram Heller, VP of business development for the Manhattan Beach, Calif. based company.

There is indeed a market for something like this. As Amazon.com’s AWS arm takes on more IT loads for customers of all sizes, it’s competing more with traditional IT outsourcing companies and hosting companies — that is just the sorts of service providers MorphLabs is targeting here. If you don’t believe that, check out the big enterprise push outlined at AWS: Reinvent, the company’s first trade show last November.

But it’s a tall order. Heller acknowledges that no service or cloud provider offers anywhere near the scale of AWS which some estimates runs more than 250,000 servers. “No one company can beat Amazon — not even Rackspace or Dell — but the perspective is that the whole industry can compete with Amazon and that’s good for us. There are 4,000 outsourced infrastructure providers in the world,” he said in an interview.

“Companies that are being disrupted by Amazon now could either download OpenStack and build a do-it-yourself cloud or they can get it from a vendor like Morph plus Dell, which provides an industrial-strength combination of hardware and software,” he added. That hardware is optimized to run Morphlabs cloud. Over time, that hardware will be built to Open Compute Foundation specifications, he said. Heller said the company will name two additional hardware partners soon.

The cost to service providers can work out to about $10 per virtual machine per month — with a hardware cost of $5 to $10 per month. With markup, they can compete with Amazon on price and — Heller insisted — get better performance.

Last March, Morphlabs and partner Dell announced mCloud Helix, an all SSD-based private cloud based on OpenStack, which it just updated. mCloud Osmium fills in the public cloud check box.

Right now customers can source their hardware from Dell — which builds optimized gear for the cloud — and software from Morph or buy everything from Dell.

Morphlabs is not alone in wanting to draw big service providers to its cloud. HP and others in the OpenStack cloud, and others outside it  are also targeting such customers.

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LogMyCalls, a platform for generating analytics from business phone calls, won in the consumer-marketing category.

Mortar Data, an open-source framework for creating Hadoop jobs, won in the big data and high-performance computing category.

Grand Cru, which has produced a customizable game for mobile devices, won in the gaming category.

TraceLink, which has an application platform for tracking pharmaceutical supply chains, won in the business-apps category.

An audience-favorite prize good for $5,000 in AWS credits — new for this year’s event — went to a three-dimensional mobile body-measuring app called Poikos.

However, while the companies and their applications might change each year, the rationale for startups deciding to use the cloud — and AWS, in particular — remain largely the same. K Young, Co-founder CEO of Mortar Data, which my colleague Derrick Harris wrote about in November, cited no fewer than four reasons why AWS fits with what his company does. As it democratizes hosting and lowers costs, Amazon is philosophically aligned with Mortar Data, Young said. It also has valuable tools, such as Elastic MapReduce and the Simple Queue Service, it already hosts plenty of data, and it’s a cinch to scale out.

The award winners drove their point home at the end of the event by walking on stage and smashing legacy servers with wooden hammers.

Not everyone is so anti-server, though. As I wrote last week, students and others partaking in a hardware hackathon at the Open Compute Summit devised ways to innovate with a rack to accommodate legacy and Open Compute servers, a Bluetooth alternative to the USB link between server and debug port and other equipment.

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Public clouds reveal crucial data

Your public cloud computing provider knows a lot about your business. That knowledge may be giving them an unfair competitive advantage against you. This has always been a fear when using a public cloud – your business relies on a cloud being built by your competition. This issue has become more acute in the past few years as many companies have leveraged their competition to build and scale infrastructure that is the critical technology foundation for their business.

To help understand the implications here, let’s examine what your public cloud provider could know about your business. Assuming that your business is using infrastructure-as-a-service (IaaS), the cloud knows: where, when and how often your users connect; the types of devices and browsers your users have; how much data your business has stored; the number of compute servers that your business uses; the geography where these servers are deployed; and your active business relationships (seen by watching traffic flows).

If you’re using platform-as-a-service (PaaS), your cloud provider could know: the number of payments that you process (and peak payment hours); your database transaction rates and query patterns; the types of data that your business sends and receives; the velocity of your software changes; when you are upgrading or releasing new products (seen by watching traffic to specific locations on your site); and more.

For most businesses, all of the above data is considered intellectual property and carefully restricted for competitive and, in the case of a public company, regulatory, reasons.

Giving away a competitive advantage

For some public cloud computing providers, knowing the above information (excepting the regulatory data) is acceptable and could help them run their cloud in a predictable and scalable manner. Public clouds in this category are the ones that solely provide IaaS or PaaS services, such as Joyent, Rackspace, SoftLayer and Terremark. (My current company, ServiceNow, also falls into this category because we are building a PaaS for enterprise IT applications and not providing competitive applications.)

Now, let’s consider public cloud companies that have businesses that directly compete with, or could compete with businesses in a variety of markets, such as shopping, movies, advertising, gaming, search, social and so on. Public cloud computing companies, such as Amazon Web Services, Google Compute Cloud and Microsoft Azure, have large businesses in one or more of these markets. Thus, these companies, while providing a cloud for your business, very well may be your direct competition as well. And the knowledge of how your business uses their IaaS and PaaS may influence their competitive offerings.

While this may be only a hypothetical concern for now, it seems safe to say that if the company that operates the cloud has a business that directly competes with your business during a major outage the cloud employees will be motivated by who pays their wages. In other words, if your business and Amazon’s both suffer an outage because of an Amazon Web Service outage, I am willing to bet that the cloud team takes the call from Jeff Bezos first.

For example, a public cloud company could offer a store that sells the same products, have a similar file or photo storage service, provide a competing restaurant review service, provide a competitive video streaming service, and so forth.  Do items that are selling well in your store appear on their storefront, or traffic patterns of your users influence when and where they launch their next service offering? Does an increase in your mobile traffic affect their product direction, or your business partnerships affect where they spend their business development efforts?

In reality, maybe not. But the temptation to share data across multiple groups in such an organization must be powerful. And that is why you may need a Chinese Wall.

Good walls make good neighbors

A Chinese Wall, a term that is believed to have originated in the business world after the stock market crash of 1929 to separate people who make investment decisions from those that have undisclosed public information, separates groups within an organization and restricts the information flow to avoid conflict of interests.

I am not a lawyer and do not have access to the latest terms of service and license agreements offered by public cloud computing companies. The agreements may already provide a Chinese Wall and cover information sharing and this potential conflict of interest. To alleviate these concerns though, the cloud computing industry needs to acknowledge the need for a Chinese Wall, validate that one does or does not exist, and a provide a way for your business to audit adherence.

Yet, a Chinese Wall and an audit process may not be enough. The profitability of your business may influence your cloud provider to become your competitor even if they do not share data across their organization.

When your business reaches the scale that attracts the attention of your cloud provider, one potential solution without relying on a Chinese Wall is to build a hybrid cloud – a cloud computing infrastructure that leverages both the public cloud and a private cloud working together to match the needs of the business. When engineered for scale, hybrid clouds have been shown to be more cost-effective and higher performing than public clouds.

Using a hybrid cloud, competitive information and processes can be kept on your private cloud where your competition cannot be tempted by confidential and competitive data. The public cloud could then be used to scale the infrastructure for multiple parts of the business without putting all of your IaaS and PaaS reliance on your competition.

If you are using a public cloud that may be your competitor today or tomorrow, you might think about asking for the construction of a Chinese Wall or to build your own hybrid cloud. Both may help keep dangerous competition at bay.

Allan Leinwand is VP and CTO, Platform Development for ServiceNow, the enterprise IT cloud company. He was previously CTO of Infrastructure for Zynga and founded the software-based networking company Vyatta.

Photo courtesy of  fotohunter/Shutterstock.com.

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