It’s as though this week was tailor-made for Bartkiewicz (pictured), who argues that companies in the cloud business–and their customers, too–are in denial about risk. And by risk I mean not the technological possibility that a service may fail to work as advertised, but in the financial liability sense.

In Amazon’s case, there’s not been any real discussion of financial liability. Even though several companies effectively had to pause operations during the period of its outage last week, the only compensation they seem to be getting, at least for the moment, is a credit on their bill for the time that affected systems were offline and an apology. Apologies and billing credits won’t work for large companies. In a case like that, someone, somewhere has to be on the hook financially in the case of failure.

Handing your data over to someone is in a way comparable to handing goods over to a shipping company who promises to get it safely from one place to the other. Something bad can happen along the way, and often does. Trains derail, ships sink or get attacked by pirates. This is why the insurance industry exists. Yes, data is slightly different because it can be copied, but you get the idea.

Anyway, as if on cue, I found in my in-box today a report from Bartkiewicz’s company, CyberFactors, which specializes in risk analysis related to cloud services. It made for very interesting reading: It has estimated the financial costs associated with the Epsilon breach, and the findings should get your attention. The security breach and release of customer data at the email marketing provider has exposed the company to liabilities that could be as high as $225 million. According to CyberFactor’s research, as many as 75 other companies were involved and the total number of affected email addresses may be as high as 60 million.

Dealing with the repercussions of the breach–informing customers about it, making changes to marketing strategies, and so on–could eventually cost those at the affected companies, which included household names like Best Buy, J.P. Morgan Chase, Citibank, Walgreen’s and the Walt Disney Company, as much as $412 million, pushing the aggregate cost of the incident to $637 million. Think about that. The exposure of an email database could wind up costing more than half a billion dollars.

Yet even that isn’t the worst of it. Once you take into account down-the-line costs, such as fines, forensic audits, litigation and loss of business, the total cost could exceed $3 billion. Roughly half of the total costs to the affected companies will occur in the first year after the breach, and the rest will come in the second and third years. Security breaches have a way of costing long after the incident itself fades from the headlines. Cloud companies, CyberFactors argues, are going to have to start thinking more like banks, insurance companies and hedge funds. The cloud is going to have to grow up.

It all started at 12:47 am PT on April 21 in Amazon’s Elastic Block Storage operation, which is essentially the storage used by Amazon’s EC2 cloud compute service, so EBS and EC2 go hand in hand. During normal scaling activities, a network change was underway. It was performed incorrectly. Not by a machine, but by a human. As Amazon puts it:

The configuration change was to upgrade the capacity of the primary network. During the change, one of the standard steps is to shift traffic off of one of the redundant routers in the primary EBS network to allow the upgrade to happen. The traffic shift was executed incorrectly and rather than routing the traffic to the other router on the primary network, the traffic was routed onto the lower capacity redundant EBS network.

EBS works using a peer-to-peer technology that keeps data in sync across several nodes, and using two networks–one fast, used for normal operation, and one slower, used as a backup when the primary one fails. Each node uses the network to create multiple copies of the data being used as needed, and when one node stops talking to another mid-stream, the first one assumes the second one failed and looks for another to replicate to. This normally happens so fast that humans aren’t even involved.

When the network change didn’t work properly, one group of EBS nodes lost contact with their replicas. When their connection was restored, so many had gone down that when they started up replicating again, the available space ran out. That left several nodes in a bad loop looking over and over again for space on other nodes when there was none. New requests to create new EBS nodes piled up, overwhelming everything else. At 2:40 am Amazon disabled the ability of customers to create new volumes. Once new requests stopped piling up, it seemed Amazon had turned a corner, but those hopes were short-lived.

The EBS volumes kept looking for new nodes to replicate to, putting continued strain on the system. By 11:30 am, technicians had figured out a way to quiet things down without affecting other communications between nodes. Once this was done, 13 percent of EBS volumes were still “stuck.” By noon, attention shifted to finding new capacity for the stuck volumes to replicate to. Not easy. That meant undergoing a time-consuming process of physically moving servers and installing them into the degraded EBS cluster. Naturally, it took a lot longer than expected. The process didn’t start in earnest until 2 am the following morning. By 12:30 pm April 22, only 2.2 percent of affected volumes were still “stuck.”

With the new capacity installed, Amazon started work on letting each node communicate normally again. This had to be done gradually, and work to dial it up just right went on well until the early morning hours of April 23. By 6:15 pm that day, operations were almost back to normal–except for the 2.2 percent of volumes that had remained “stuck.” It turned out they would have to be recovered manually. Their data was backed up to Amazon S3, its general storage service. By noon the next day, all but 1.04 percent of that data was recovered.

A more intensive recovery process was tried, and in the end 0.07 percent of the data involved in the crash could not be recovered, Amazon says.

The company says it is auditing its process for carrying out changes in its network, which is where the problem started, and that it will “increase automation” to prevent a similar mistake from happening again. From that statement I gather that it was a human-caused mistake that was then exacerbated by the way the cloud system was designed to work. Customers who used the affected services, whether or not their services were interrupted, are getting a 10-day credit. The list of other changes it is promising is long and detailed, ranging from having more capacity on hand for use in a recovery to making it easier for customers to access more than one availability zone (those who had done prior to the outage fared better than those who hadn’t) to improvements to its status dashboard.

Finally, Amazon apologized:

Last, but certainly not least, we want to apologize. We know how critical our services are to our customers’ businesses and we will do everything we can to learn from this event and use it to drive improvement across our services. As with any significant operational issue, we will spend many hours over the coming days and weeks improving our understanding of the details of the various parts of this event and determining how to make changes to improve our services and processes.

What’s not clear is the effect not only on Amazon and its reputation, but on the planning of customers who rely on its cloud services or are thinking about using them. A failure as widespread and as widely publicized as this may be forgiven but it won’t be forgotten. Mike Rowan, CTO of RatePoint, a reputation management service for small businesses, indicated on Twitter that he was happy with the billing credit. But time will tell if Amazon loses customers over this.

Sony says that the credit card data associated with the accounts was encrypted, though there are anecdotal reports of credit card fraud occurring coincidental with the timing of the breach.

On top of that, regulators in places as varied as Connecticut and the U.K. and Ireland are demanding information, often the first step in investigations that lead to lawsuits. The office of Ireland’s data protection commissioner (cool title) says it wants a full report on the incident by the end of the week. The U.K.’s Information Commissioner’s Office is investigating. Perhaps Sony’s one lucky draw in all this, as Parmy Olson of Forbes notes, is that it won’t have to face the full fury of the European Union because authority for data privacy issues are reserved to individual member countries.

Meanwhile, the attorneys general of several U.S. states are starting to rumble, starting with Connecticut’s George Jepson, who said he is launching an investigation, while his counterparts in Missouri and Iowa are making the kind of public statements that are often a precursor to investigations of their own. A few lawmakers in Congress are tsk-ing disapprovingly too, mulling hearings and new legislation. Below is an appearance on CNBC by Sen. Richard Blumenthal, D-Conn., suggesting that the Department of Justice should launch its own investigation.

Thanks, Senator. However, my guess is that if the systems compromised are in the U.S.–and given the number of PlayStation Network customers there are in the U.S., how can they not be?–then one branch of Justice is already likely involved: The FBI. Hasn’t Sony already disclosed that it’s working with law enforcement? This isn’t exactly the sort of thing for which you call a local police agency.

It’s a big win for HP, no question, though it comes at a time when NASA’s mission is in a bit of flux. The Space Shuttle program is winding down after three decades, and at least for a few years, the U.S. won’t be sending any astronauts into space, at least not on government-issue spacecraft. The final flight of Space Shuttle Endeavor is scheduled for tomorrow, and then the final flight of Atlantis is on track for June. And that will close the Shuttle era.

As it happens, HP’s announcement of its contract with NASA coincides with a media briefing expected today about the next stage in manned space flight, sponsored by the private sector. Last week the agency handed out $269 million in seed money to several companies, including the aerospace giant Boeing and SpaceX, the private space outfit founded by PayPal founder Elon Musk. The plan is to have private contractors take over the job of sending astronauts to the International Space Station, though that will take a few years. In the meantime, astronauts will be hitching a ride on Russian spacecraft at a cost of $63 million a shot.

Whatever the outcome, though, I guess this means that when you see TV shots of Mission Control in Houston, the computer screens they’ll be looking at will have HP logos on them.

Enterprise applications themselves, Chuang says, have to change. And that requires a platform to build new applications that are social from the start. The company has built what it calls the Workplace Interaction Network, or WIN. It’s a development platform that lets companies build and deploy their own cloud-based enterprise applications that take into account the connections that employees have within the company and with customers and partners on the outside.

The company is announcing today that it has landed a $12.6 million Series A funding round led by Andreessen Horowitz, the VC fund led by Opsware founders Marc Andreessen and Ben Horowitz. Also involved in the round are Chuang himself (pictured) and another angel investor, Bill Janeway, former vice chairman of Warburg Pincus. (Andreessen Horowitz is having a busy week.)

Millions of Facebook and Twitter and LinkedIn users implies there’s a huge amount of value in bringing the social factors into existing and still-to-be-created kinds of enterprise applications. It’s a crazy area of interest in the marketplace right now. That Salesforce.com chose to launch Chatter with an ad during the Super Bowl and that companies like Jive Software are attracting funding and seriously eyeing an IPO suggest that a fundamental shift in enterprise applications is underway, but it’s still early days. Most businesses, Chuang writes on his blog, still don’t get it.

“It’s almost impossible to believe, but after hundreds of millions of people worldwide have embraced social applications in nearly every aspect of their personal lives, businesses are still resisting social applications,” he writes. “In fact, many enterprises have not made any significant investment in social applications despite obvious use cases for customer service, HR, marketing, product development, recruiting, sales, training and much more.”

Like it or not, he says, employees are using these new lines of communication to get work done, and companies can either turn this trend to their advantage or get left behind. “When you stop to think about it, an employee’s network (and their ability to communicate and collaborate) is what really fuels business,” Chuang writes.

AH partner Ben Horowitz writes on his blog announcing the funding deal, and describes Chuang as the CEO he “admired most during the last decade.” Why? For getting behind and pushing through–over the objections of a skeptical board of directors–BEA’s 1998 acquisition of a little company called WebLogic. It was an early leader in the application server market and went on to grow into a significant portion of BEA’s business. His board convinced, Chuang was promoted to BEA’s CEO in 2001. Ultimately–and as Horowitz puts it, thanks to shortsighted shareholders–BEA became part of Oracle in 2008.

“The transition from today’s Web back-end architectures to tomorrow’s cloud computing will result in profound benefits,” Horowitz writes. “Over time, every existing application will be rewritten to take advantage of the cloud and these benefits. In addition, an incredible new class of never-before-possible applications will be developed.” Change is coming. Get ready.

What’s he been doing since then? Gearing up for another venture, I’m told. Some time last year, James, flush with the $80 million and change he made from Adobe as one of Omniture’s biggest shareholders, hit the eject button on his gig as an Adobe exec and acquired/bought out Corda Technologies, a business data dashboard start-up based in Lindon, Utah. Corda forms the basis of James’ new venture, but its vision is substantially bigger, I’m told.

Until recently, James has been bankrolling the venture out of his own pocket. But in recent weeks he’s been raising money for a seed round. And as seed rounds go, it’s unusually large. I don’t know a precise amount, but it’s somewhere north of $5 million and less than $8 million.

I’ve confirmed that Andreessen Horowitz, the venture capital fund run by Netscape creator Marc Andreessen and his partner Ben Horowitz, the former CEO of Opsware–the software company they sold to Hewlett-Packard–have ponied up about $1 million, betting that James can strike gold once again.

Corda specializes in pouring all types of company performance data into a dashboard for executives. It will have a new name, still undecided. In fact, the Corda Web site doesn’t even mention the fact that James has acquired it. Still, James has started assembling a team in Utah.

His acquisition of Corda and his an offer to hire a former Adobe employee caused a legal spat between James and Adobe, as reported by The Salt Lake Tribune. Adobe claimed that James violated non-compete agreements he signed when he left the company in buying Corda and hiring trying to hire away a former Adobe employee. The Utah case is over, ordered stayed by a judge, while a case that James and Corda brought in a Santa Clara County court in California against Adobe alleging unfair competition is still pending.

Update: Since I first published this story we’re learning more about who’s investing in this still-unnamed Josh James-helmed venture. A source familiar with the matter says that aside from the $5 million-plus seed-round, which should be announced officially within the next few weeks, James is already pretty far along in the process of raising a Series A round that will be announced later in the year. A source familiar with the situation says that Benchmark Capital–which has backed companies like Mint, the personal finance site acquired by Intuit last year, and others as varied as eBay, Instagram and Jamba Juice–has committed up to $30 million to the new company.

A Second Update:I’ve just confirmed that Ron Conway’s SV Angel is investing in the seed round.

“We have discovered that between April 17 and April 19, 2011, certain PlayStation Network and Qriocity service user account information was compromised in connection with an illegal and unauthorized intrusion into our network.”

In an email that it is sending its 70 million-plus customers of the two services, Sony said it believes that the attackers obtained personal information associated with accounts, including names, addresses, email addresses, birthdates, usernames and passwords. It said there is “no evidence” that credit card accounts have been breached, but that it cannot rule out that possibility. “If you have provided your credit card data through PlayStation Network or Qriocity, out of an abundance of caution we are advising you that your credit card number (excluding security code) and expiration date may have been obtained,” the statement says.

The attackers may have also seen purchase histories. Sony also says that a class of lesser accounts, known as sub-accounts, that are usually held by adults for their children, have been breached. “If you have authorized a sub-account for your dependent, the same data with respect to your dependent may have been obtained,” Sony’s statement says.

It’s the latest in a long string of breaches involving customer data. Last year Silverpop Systems suffered a data breach that forced several large companies including McDonald’s and Honda to advise people who had signed for marketing messages from their Web sites to change passwords they use on other sites. As with those incidents, Sony is asking customers to change any passwords they may also use on other sites. (Lesson: Don’t use a single password on more than one site.)

The breach opens Sony’s customers up to the possibility of other kinds of attacks using their information. Armed with one set of information, say the knowledge that they have an account on Sony’s PlayStation Network, an attacker could send a customer an email pretending to be Sony seeking an updated credit card number or could send one pretending to be from the target’s bank asking for account information. As Sony puts it:

For your security, we encourage you to be especially aware of email, telephone, and postal mail scams that ask for personal or sensitive information. Sony will not contact you in any way, including by email, asking for your credit card number, social security number or other personally identifiable information. If you are asked for this information, you can be confident Sony is not the entity asking.

Sony says it has hired an outside security firm to conduct an investigation into the incident, though it declined to name it. Its gaming service still hasn’t been restored, though it said it expects to have it up and running again within a week. The incident has marred the releases of two eagerly anticipated games on the PS3, Portal 2 and Mortal Kombat, leaving those who bought them playing only in non-network mode.

Oracle’s statement yesterday called the appointment of Safra Catz as president and CFO “permanent.” While that’s clearly meant to convey that this is no interim appointment, which was the case in her first turn as CFO during a three-year period that ended in 2008, does it also imply that Catz has reached her peak on the management ladder?

At least one analyst has concluded that it does. Pat Walravens, an analyst at JMP Securities tells Bloomberg that Catz’s appointment sets the pieces in place for President Mark Hurd, the 54-year old former Hewlett-Packard CEO, to take the reins from CEO Larry Ellison at some point in the future. Hurd, he says, gains more day-to-day control over the company, giving him a logical springboard to the corner office.

But is it really so clear? Before Hurd arrived on the scene, it was Catz who had always been described as Ellison’s heir apparent. She won her stripes primarily overseeing Oracle’s $10.6 billion takeover of Peoplesoft in 2005. At an Oracle event in 2005, Ellison said “If I dropped dead tomorrow, Safra Catz would be CEO of Oracle.” That implies that a formal succession plan saying exactly that was once–and may still be–in place. And by getting a title that begins with C, something Hurd doesn’t have, there’s a further implication of seniority that effectively makes Catz appear to be the second most powerful person at Oracle after Ellison.

Obviously there will be more tea-leaf reading to come from all this. And there will be more signals from Oracle that will be interpreted and re-interpreted again. Ellison is 66 years old and has been running Oracle since the days of the Carter Administration. He’s showing no signs of letting go of the pilot wheel just yet. (You just know he’s going to live to be 180.) Hurd is 54 and Catz is 49. Ellison likes them both. Time will eventually tell who gets the nod.

Last week I talked with David Young, co-founder and CEO of Joyent, an Amazon rival with 30,000 customers around the world. His criticism of Amazon in this instance is rather harsh. The way the Amazon cloud is built, he said, virtually guaranteed that a service outage such as this would happen. While on one hand he gives Amazon high praise for “evangelizing the cloud computing model,” with the other he disparages it as “the Atari of the cloud.”

“Amazon does not represent the cloud,” Young says. “These guys are booksellers who got in the cloud business. That’s like Nordstrom’s getting into the cash register business,” he told me. “They may be the market leader, but there’s a bunch of us who are building things in such a way that we don’t see these downtimes.”

It’s hard to miss Amazon’s outsize influence. Though Amazon Web Services amounts to just a fraction of the company’s overall revenue, it is the market leader, controlling about 60 percent of the market with Rackspace, IBM, Joyent and Terremark, recently acquired by Verizon.

Joyent, which is privately held and backed by investments from Greycroft Partners and Intel Capital, would never have suffered an outage, Young claimed, because of the way it is built. Amazon, on the other hand, was never designed for what he calls persistent computing that customers need to be available all the time. The problem, he said, started in Amazon’s Elastic Block Storage, which is vulnerable to being overwhelmed by demand, something he likened to a run on a bank, where depositors panic and rush to withdraw the cash from their accounts.

Essentially, he said, Amazon became a victim of its own popularity, unable to meet the demands placed upon the EBS storage infrastructure by the network, causing in the end a cascading failure. The company has blogged about its theory in greater technical detail here.

Meanwhile, there were Amazon customers who managed to keep their services up despite the crash, and they were comparing notes today. Don MacAskill, CEO of the photo-sharing site SmugMug, blogged about how designing for failure allowed its service to remain live during the crash. Others tweeted, like Mathias Meyer of Basho Technologies, who noted that having their service running in more than one Amazon region helped avert failure.

There were others. Donnie Flood, VP of engineering of Bizo, an advertising service aimed at business executives, said that the company used all of Amazon’s regions except its most recently launched one in Japan, and combined that with a global Domain Name Service system that would direct traffic to the nearest Amazon region. When Amazon’s U.S. East region went down, all traffic in the U.S. was routed to its Amazon instances running in Amazon’s Western U.S. data center. “We were able to stay up fully the entire time,” Flood said.

Oren Michels, CEO of Mashery, a cloud-based manager of software APIs, said that his company had additional cloud infrastructure in place from Internap that took over when Amazon failed. Neither Michels nor Flood said he was likely to move the services currently hosted with Amazon to another provider.

Amazon hasn’t made any public statements about what happened, beyond those made in its status dashboard, and it hasn’t responded to any of my messages seeking a comment on any aspect of this. The company reports earnings tomorrow, so expect some questions on the conference call about Amazon’s terrible, horrible day that stretched into nearly a week.

“Safra already has the long-standing confidence of our employees, our board and our shareholders,” said Oracle CEO Larry Ellison in a company statement. “There is no more logical choice for CFO.” She joined Oracle in April of 1999, started serving as director in 2001 and became a president in early 2004 (and was joined in that position last year by former HP CEO Mark Hurd). She’s also a director at HSBC Group.

Oracle offered no elaboration on Epstein’s departure.

Catz’s most recent public duties included running Oracle’s quarterly earnings conference call last month, while Ellison served on jury duty.

Catz herself appeared in court not once but twice during Oracle’s intellectual property trial against SAP, and annoyed SAP lawyers with the “colorful analogies” she cooked up that were intended to make the point that Oracle deserved the $1.3 billion a jury had awarded it, not the $40 million SAP said it owed Oracle.

When he first joined Google nearly seven years ago to start its enterprise division, Gmail was barely out of the gate and Blogger was the search giant’s most notable acquisition. What could Google offer enterprises that they weren’t already getting from Microsoft and Oracle and IBM and scores of other established software and hardware vendors?

The answer? An alternative. Sheth pitched Google’s trio of senior executives–Eric Schmidt, Larry Page and Sergey Brin–on the idea of experimenting with standard office applications–a word processor, a spreadsheet–that operated entirely within a browser. The product evolved into Google Apps, and while Microsoft Office still dominates the enterprise desktop, it’s widely accepted that Google Apps has made some important inroads against it: 3 million businesses use it in some way, and some 30 million people use it in their businesses.

Aside from the scores of companies, governments and non-profits that have adopted it, there are millions of college students using it, attracted by the zero-dollar price tag. Microsoft has responded with its own cloud-based office offering, Office 365, but its clear that Redmond’s traditional grip on the enterprise desktop isn’t quite as tight as it once was.

Now Sheth has an even bigger target in mind. If Office isn’t so sacred, why does Windows have to be? As the Group Product Manager Chrome OS for Business, he makes an interesting argument that the Redmond-centric world of corporate desktops is quietly nursing a desire for change. Where will it come from? A combination of cloud computing, and a desktop that’s stripped down to nothing but a browser. I talked with Sheth by phone earlier this month and my first question was about his education.

NewEnterprise: You did your undergraduate degree in electrical engineering, but now you work in software. Circuit design wasn’t for you?

I realized I liked software a lot more than hardware. But I was most of the way through with electrical engineering at Stanford. So I did my masters in software.

Does having been educated first on hardware give you a different perspective on any of the work you’re doing at Google?

It is actually relevant. A lot of what I’ve done involves software and user-facing interfaces, but it also involves a lot of infrastructure. When you look at VMWare, which is where I worked before Google, it’s about what you can do with a combination of hardware and software and change the game. It’s similar with Google Apps. It’s a big set of user-facing applications, but the big thing is the cloud computing infrastructure that’s underneath. The fundamental question is about how you wire computers together in the most efficient way possible. That is really the bread and butter underneath Google Apps. And finally with Chrome OS it’s the same question: What can you do to the form factor of the hardware if you’re really only running a browser on it. The background in hardware has served me well.

So you joined Google about seven years ago with the mission of creating something–you basically had a blank sheet of paper–that Google could offer the enterprise. And your first idea got shot down. What was it?

At the time I joined Google the enterprise division was literally 25 people. We had a few engineers and salespeople, and we brought in a manager, Dave Girouard. I came in with the explicit mission of starting something else within Google that was to be aimed at businesses. And that something else was completely undefined. When I was still at VMware, a friend sent me a Gmail invite, and I started using it, and it was better than my corporate mail. I thought it could be a very interesting enterprise product. After I joined, I pitched Eric, Larry and Sergey on the idea of putting Gmail into an appliance and shipping it out to corporations. They didn’t go for it. I went back six months later, with some new insight, specifically that we could use our server architecture to make it easier for businesses and educational institutions to deploy and manage email, and that from there we could move up-market to deploy applications. We got exactly one engineer to work on that.

It was very much like running a start-up. I was the product manager and was tasked with starting this new business and we went through all the classic things that a start-up does. Building the product, building the team, selling the vision to an early set of adopters–San Jose City College was our first college customer and Northwestern and Arizona State followed after that. We started small and incubated it within Google. We did a lot of experimenting with that small team to see what was viable and eventually we were able to get more resources to make it bigger.

So how does the Google Apps experience compare to your new role in building a business around Chrome OS for businesses?

It’s very similar. In Chrome OS I’m back in start-up mode. Essentially I’m trying to build a vision. We have a small team of people that all sit together in one area, building out the business model, and we’re trying to start small and grow from there. One way to look at Google is as a closed confederation of start-ups. All these teams are empowered to build something that is visionary. But we all have a lot of leverage behind us, and so we’re able to do a lot more than we ever would have been able to do if we were a small company.

I see a potential problem there: Don’t all these start-ups within Google run the risk of creating independent silos or fiefdoms that aren’t all on the same page? We hear a lot of criticism of the silos at companies like Sony or even Microsoft. Even at Google, there’s Google Voice, which is a great product but doesn’t really fit with anything else, though I understand it eventually will. But how do you avoid this silo problem?

It’s a great question, and its something we’ve thought about a lot. There are basically two extremes. The first extreme is on one hand you have different teams doing things completely different from each other. The other extreme requires that everything be integrated extremely well together. We tried to find a happy medium. The benefit for one is that you can move quickly. But if you do the other extreme, you slow down innovation. Your project may take several times longer. One big advantage is the Google infrastructure is all there. You don’t have to think about user authentication or how to store files. That’s all done for you, so everyone is using the same infrastructure. A lot of the parts you need are there and you just build on top of them. You can never strike a perfect balance, but we think ours is pretty good.

So what’s your mission with the Chrome OS?

My mission is to bring Chrome to business and to ask how we make it something that can reshape the enterprise desktop. The thing that was really intriguing for me, is that cloud computing has done so much for businesses. You don’t need to think about deploying the hardware, you can just turn things on. You don’t need to worry about massive up-front payments for hardware, you can just pay monthly for what you use. And your applications just keep getting better. In my mind the cloud really stops at the desktop.

The desktop is tremendously hard to manage. It costs a lot to maintain, most of the cost for a business is all in the maintenance. It doesn’t get better over time, it gets slower as you use it. I think there’s a huge opportunity to bring the principles of cloud computing to the desktop. It gets better, and it’s fast and secure. That’s the vision. We think we can do that because we have a unique operating system. It’s just a browser that’s completely stateless. As a result of that, you can boot up in 5 to 10 seconds. And no matter where you go, you log in, you have your entire desktop. If the system breaks, that’s not a problem, you just jump on to another system. If you lose it, it’s not a problem because its stateless.

There are people who would say its crazy to try and dislodge Windows as the operating system of choice for businesses, and yet you think you can do it. What kind of results have you seen so far?

If you just have a browser and take out everything else, life gets a lot simpler. And this is why I think that the desktop OS is ready for a radical change much like the enterprise applications were a few years ago. One thing we’ve found is that very significant portions of the population are using only a browser right now. Those trends show that this area is ripe for a change. If you look down the line in three years, the majority of those business users will use only a browser. We created this pilot device called the Cr48, which is a notebook with Chrome OS installed on it. We received 50,000 applications from businesses interested in trying it, and we now have thousands deployed in the field. We have companies like Intercontinental Hotel Group, Virgin American and Groupon using them for different things. We’ve even heard from the US Army Intelligence Office. We heard from a lot of companies we didn’t expect interest from.

I think you’ll see some early adopters, groups of users within companies, this year. Some companies’ pilot programs want to do large roll-outs to call centers and to customer service reps and some want to roll them out to mobile sales people. Many will find that it makes sense to them because it brings the cost down. No one wants to pay to have to fix a system that’s broken because two applications are in conflict with each other. No one wants to pay to go patch an operating system. That kind of thing is going to become a lot easier with Chrome OS.

To coincide with Earth Day, which apparently was today, Google decided to give a little peek inside its data center in Moncks Corner, South Carolina. Google would like you to know that its data centers are very energy efficient, as you’ll learn toward the end of this segment.

Google probably also wants to take advantage of the fact that it scored higher that Apple on the Greenpeace Dirty Data report because its facilities rely less on coal-generated power than those of Apple, Facebook, Hewlett-Packard, IBM or Twitter. But the environmental stuff is saved for the end.

And if this isn’t enough data center fun, you might have missed my tour of the Lucasfilm data center last month, the one that when I last saw it, was actively cranking on the bits behind all the special effects for the summer blockbuster movies. Hey, Memorial Day is about five weeks away!

The bulk of the video focuses more on how Google protects data belonging to its customers with multiple layers of physical security (hint: don’t even think of trying to sneak in), and destroying hard drives when they wear out. After watching it twice, what I really want to know is this: Where can I get myself one of those crushers?

(Fort Knox Image via Wikimedia Commons)

While most of the larger sites that were initially affected–like Foursquare and Quora–have come back, lots of other sites are still having trouble. The New York Times special project site is still down, as is the news application page on ProPublica. Everyblock remains offline this morning. Heroku said it was partially back, but still working to restore shared databases. Two sites popular with the Hollywood crowd, Harry Knowles’ Ain’t It Cool News and Box Office Mojo were both down this morning.

One site that caught my eye on Twitter this morning was Blue Sombrero, which offers a service for clubs and organizations to register its members online for events. It took to Facebook this morning to vent its frustration and apologize to its customers. There are still, apparently, lots of Blue Sombreros out there. A site called EC2disabled.com purports to be a complete list of sites affected by the outage.

Amazon continues to send intermittent status updates via its dashboard, but it’s difficult to get much of an idea as to when they expect to be fully back to normal, though minutes ago it said it is starting to see “meaningful progress” in getting things under control. These are the latest messages from its EC2 status feed:

6:18 AM PT We’re starting to see more meaningful progress in restoring volumes (many have been restored in the last few hours) and expect this progress to continue over the next few hours. We expect that we’ll reach a point where a minority of these stuck volumes will need to be restored with a more time consuming process, using backups made to S3 yesterday (these will have longer recovery times for the affected volumes). When we get to that point, we’ll let folks know. As volumes are restored, they become available to running instances, however they will not be able to be detached until we enable the API commands in the affected Availability Zone.

Earlier it said:

2:41 AM PT We continue to make progress in restoring volumes but don’t yet have an estimated time of recovery for the remainder of the affected volumes. We will continue to update this status and provide a time frame when available.

And before that:

10:58 PM PT Just a short note to let you know that the team continues to be all-hands on deck trying to add capacity to the affected Availability Zone to re-mirror stuck volumes. It’s taking us longer than we anticipated to add capacity to this fleet. When we have an updated ETA or meaningful new update, we will make sure to post it here. But, we can assure you that the team is working this hard and will do so as long as it takes to get this resolved.

One of the companies listed on the EC2 Disabled site is Sony Online Entertainment. It’s probably just a coincidence, and its Web site is up this morning. However, it’s notable because of another ongoing outage now in its second day as well, of Sony’s Playstation gaming network. It’s latest official blog entry says the network may be down for a day or two.

The buzz about this outage, though Sony hasn’t addressed it, is that it’s the result of another attack by Anonymous, the loose coalition of hackers who are outraged at Sony’s recently settled legal fight with George Hotz. Known by the nom-de-keyboard GeoHot, Hotz had figured out a way to jailbreak the Playstation 3 so that it could run games not approved by Sony. Anonymous has denied involvement. The outage started Wednesday night and coincided with the release of three big games.

Companies as large and widely known as Foursquare and as small and unknown as CampgroundManager.com all turned to Twitter to advise their customers that service would be down for awhile, apologizing and asking for patience. It’s because of this that Amazon will have to work extra hard to win back the unquestioning confidence it has so long enjoyed. Meanwhile, competitors like Microsoft Azure, IBM and others will do their best to capitalize on this and lure customers away from Amazon.

Amazon wasn’t helped as the day went on and the list of affected customers grew longer and included ever more prominent names: The New York Times lost service on its Projects subdomain at projects.nytimes.com, a section where the Times publishes special projects like this one on the Census (link goes to Google Cache for now).

Another victim was ProPublica. Three days after winning its second Pulitzer Prize in as many years, the section of ProPublica’s site where it hosts its data-heavy news applications, such as this one which displays federal stimulus funding by county, was out of commission. (Again, the link goes to a Google Cache.)

Everyblock, a hyper-local news site that became part of MSNBC in 2009 is still down as of this writing. Foreign Policy, the Washington Post-owned journal, saw its Web site fail too, but as noted by Jim Romenesko today, it quickly switched to publishing its content on Facebook, and made light of the situation on Twitter.

One victim which surprised me was Heroku, the Cloud-based Web development concern that Salesforce.com acquired last year. Heroku kept its users apprised of the situation throughout the day without mentioning Amazon by name. Interestingly, Salesforce’s infrastructure showed no sign of trouble all day.

To its credit, Amazon did its best to communicate about the situation all day, but the incident couldn’t help but give its Web services division–which is relatively small as a percentage of revenue but obviously punches above its weight in terms of influence–a black eye. Late in the day it had isolated the trouble to a single “availability zone,” or group of machines running together in its Northern Virginia data center, and was trying to shift services away from the affected zone.

As of 4:20 PM PT its latest messages indicate it seems to be getting closer to resolving the issue, though many services were still reporting on Twitter that the outage was keeping them offline.

At 1:48 PM PT, the status dashboard for EC2, its compute cloud service, said:

A single Availability Zone in the US-EAST-1 Region continues to experience problems launching EBS backed instances or creating volumes. All other Availability Zones are operating normally. Customers with snapshots of their affected volumes can re-launch their volumes and instances in another zone. We recommend customers do not target a specific Availability Zone when launching instances. We have updated our service to avoid placing any instances in the impaired zone for untargeted requests.

Another message concerning its Elastic Beanstalk service came at 2:16 PM PT:

We have observed several successful launches of new and updated environments over the last hour. A single Availability Zone in US-EAST-1 is still experiencing problems. We recommend customers do not target a specific Availability Zone when launching instances. We have updated our service to avoid placing any instances in the impaired zone for untargeted requests.

The outage also affected Amazon’s CloudFormation and CloudWatch.

2:40 PM PT We are continuing to see delays and failures creating and deleting stacks containing EC2, EBS and RDS resources in a single Availability Zone in the US-EAST-1 region. We are working towards a resolution. Please see the Amazon Elastic Compute Cloud (N. Virginia) and Amazon Relational Database Service (N. Virginia) status for more details.

This message went out to Amazon MapReduce customers at 3:12 PM:

Customers can now start job flows with CC1 instances in the US-EAST-1 region by not targeting a specific Availability Zone.

Not that a big and nasty outage isn’t serious business. It certainly is, and I feel for the people at Amazon and all their customers. But having sat through more on-the-job system outages in my career than I care to count, I know that at the end of the day you have to laugh a bit at the head-slapping frustration of it all, and play a little loud music. In that spirit of sympathy and understanding I offer Freddie King’s “Going Down.” Sorry, Amazon. Here’s hoping tomorrow’s a better day.

(Image and headline obviously inspired by the Judith Viorst book I so loved as a kid.)

I wasn’t surprised that this data–which shows basically everywhere an iPhone owner has been with the phone in his or her possession since iOS 4 was released–is being collected. But it’s important to make one thing clear before we go any further: There’s no evidence that Apple is collecting any information about where you go. It does collect anonymized information on where iPhones go, and it has a number of legitimate business purposes for doing so.

Nor is any of what Apple is doing some kind of newly discovered secret. In fact, it has been documented for some time. (For more on this, read this excellent post by Alex Levinson, an expert on iOS security.) In fact, Apple has been very clear in its privacy policy about what data it collects, and even highlighted the part about location data in a letter to Congress last year.

Got all that? Okay, let’s proceed.

I found the revelation unsurprising because of stories I’ve written in recent years on the new field of academic research known as “reality mining.” I wrote about it for BusinessWeek in 2008 and interviewed two researchers from MIT, both of whom told me that there is a great deal of value–both commercial value and value to society at large–that can come from gathering data on where people go, and also when they go there and who they go with.

The value comes not in gathering that data about you personally, but in aggregating it, basically mixing it all together with the same data about everyone else, until you have huge databases on the comings and goings of millions of people. It’s helpful for a city to know, for instance, how many cars cross a bridge between the hours of 7 am and 8 am, and how the traffic varies by the day of the week. It’s helpful to see how many people drove to the last New York Yankees game and how many people took the subway, and also how bad the crowd congestion was both on the streets and on the trains.

Getting an accurate picture of exactly how many people are involved is tricky. You can try to do a labor-intensive count or you can estimate, but both are messy and subject to error. A wireless phone is a pretty good sensor because almost everyone will be carrying one and each phone identifies itself to the closest cell tower, so it’s easy to count. The value comes not from knowing who was where at any given time, but how many were there.

Wireless phones already play a big role in tracking traffic congestion. If you use a GPS receiver in your car that gives you live traffic information, those green and red lines that appear on the map are often generated by thousands of cars with wireless phones in them, all of them reporting their location, speed and direction of travel. The company that tracks that information, analyzes it and turns it into something useful is Inrix, and its name can be found stamped on the packaging of a number GPS receivers. When yours pipes up to say “traffic ahead” or says it is changing your route because of congestion, it’s because it is getting a live data feed that is generated in part by information gathered from wireless phones. Are you still so creeped out?

But let’s take it a step further and imagine a case where it actually might be useful and not anonymized. Let’s say you’ve caught a really bad flu but it’s in its early stages, so you’re feeling just a little sick and you go to work. The next day you find out you’ve got this year’s super-flu virus. Would there be a public health benefit in being able to look through a record of where you’ve been? Could there also be a benefit from cross-referencing that with data from other people’s phones to find out how many people–and who–has been within close enough proximity to you during the last 24 hours to maybe catch this flu from you? Data gathered from your phone and others could conceivably help arrest the spread of that super flu by giving authorities an accurate picture of how many people are connected in the branching chains of potential infection.

After a while you start seeing patterns, and these patterns can help solve other problems large and small. Does your town need a traffic light at that intersection based on the number of people who drive through it every day? Does your city need to build another subway line because the existing ones are overwhelmed? Reasonable minds can have different perceptions as to the scale of problems. Real, unimpeachable data can only add clarity to the debates.

MIT’s Sensable City Lab has done some fascinating work in this area. Its most recent project has taken the team to Singapore, and I’ve embedded a video below that shows samples of some of the data they’ve gathered and turned into visualizations. Another older video from a 2008 project, The New York Talk Exchange, showing calls made to and from New York, is just as interesting.

Is there a commercial use for this sort of data? You bet. Advertisers will always pay for the right and the ability to reach you in some new and incrementally intrusive way. But that’s just the way that things go, though more often than not, if you don’t like it, you have the ability to opt out or not participate. But people do choose to participate. Ask the eight million Foursquare users why they like voluntarily giving up their live location data day after day. They have clearly opted in because there’s something about that they like, and it isn’t just claiming the mayorship of the corner tavern. And there are probably scores of other commercial uses for the location data on our phones that I’m not imaginative enough to think of.

My point in all this is really simple. Phones have for about a decade had GPS chipsets in them that can keep track of the phone’s precise coordinates–latitude and longitude plus their position relative to a cellular tower. To anyone who is surprised that this data is being collected and even being used I have only this to say: Well, duh! You better get used to it. As long as there’s value in measuring where we go, the phones we take with us everywhere are going to be the device used to do the measuring.

Yes, there needs to be a clear set of rules of the road, and I think the discussion touched off by this round of coverage will help us get to setting those rules. But the data is so valuable, and the potential for benefits are so great, that no amount of consumer outrage is going to put an end to your phone keeping track of where it is.

(Cool Image borrowed from MIT’s New York Talk Exchange)

A failure in the cloud is of course one of the fundamental problems that its critics always point to. Yes, you can save money and time and effort by farming your IT services and infrastructure out to someone else. But when those services crash unexpectedly, you–and scores of others that rely on the same infrastructure–are left to wonder what’s going on and when it’s going to be fixed.

As of now, it seems like Amazon is getting the situation under control, it seems to be getting worse, as other parts of the Amazon service that are tied to EC2 are reporting various failures via Amazon’s status dashboard. Failures are showing up Elastic Beanstalk, and the relational database, and Cloudwatch among others.

Amazon’s status messages are below.

1:41 AM PT We are currently investigating latency and error rates with EBS volumes and connectivity issues reaching EC2 instances in the US-EAST-1 region.

2:18 AM PT We can confirm connectivity errors impacting EC2 instances and increased latencies impacting EBS volumes in multiple availability zones in the US-EAST-1 region. Increased error rates are affecting EBS CreateVolume API calls. We continue to work towards resolution.

2:49 AM PT We are continuing to see connectivity errors impacting EC2 instances, increased latencies impacting EBS volumes in multiple availability zones in the US-EAST-1 region, and increased error rates affecting EBS CreateVolume API calls. We are also experiencing delayed launches for EBS backed EC2 instances in affected availability zones in the US-EAST-1 region. We continue to work towards resolution.

3:20 AM PT Delayed EC2 instance launches and EBS API error rates are recovering. We’re continuing to work towards full resolution.

4:09 AM PT EBS volume latency and API errors have recovered in one of the two impacted Availability Zones in US-EAST-1. We are continuing to work to resolve the issues in the second impacted Availability Zone. The errors, which started at 12:55AM PDT, began recovering at 2:55am PDT

5:02 AM PT Latency has recovered for a portion of the impacted EBS volumes. We are continuing to work to resolve the remaining issues with EBS volume latency and error rates in a single Availability Zone.

Update: Here’s more companies that are affected by the outage, according to status updates on Twitter.
Hootsuite, the cloud-based Twitter client, is down because of the outage too. Here’s what the site looks like right now. Also down is the Hootsuite URL shortener ow.ly.

SCVNGR is reporting that it is down too as a result of the outage.

Discovr, an iPad music app, reported that it went down, but shortly reported its service was restored.

Wildfire, a social media app, reports that it is down.

Livefyre is down.

Here’s an interesting one. CampgroundManager.com, apparently a software-as-service application used to manage campgrounds, say it is down.

A service called Totango, which appears to do something with managing customer relations and subscriptions, had some issues, but moved some things around, and got things mostly working again.

ESchedule, a Canada-based employee scheduling service, reports its service is down.

ZeHosting, a Web host, says it is experiencing slowdowns.

Recorded Future, which bills itself as a “temporal analytics engine” is reporting an outage.

PercentMobile, a mobile analytics firm, say its service is down.

The Cydia Store, which hosts applications available for jailbroken iPhones, reports it is down.

Here’s the latest update from Amazon:

6:09 AM PT EBS API errors and volume latencies in the affected availability zone remain. We are continuing to work towards resolution.

Here’s another update from Amazon

6:59 AM PDT There has been a moderate increase in error rates for CreateVolume. This may impact the launch of new EBS-backed EC2 instances in multiple availability zones in the US-EAST-1 region. Launches of instance store AMIs are currently unaffected. We are continuing to work on resolving this issue.

Another Amazon update:

7:40 AM PDT In addition to the EBS volume latencies, EBS-backed instances in the US-EAST-1 region are failing at a high rate. This is due to a high error rate for creating new volumes in this region.

Updating again at 9:10 AM PDT

Amazon continues to post regular updates on its multi-faceted cloud services outage this morning. The latest update message came in about 15 minutes ago, and is reprinted below.

I’ve heard about three other sites that are affected by the outage. Radarsync, a cloud-based service that updates drivers for Microsoft Windows users tells me via Twitter that its service is down. I’ve also seen that Thrillist is having some troubles sending emails. Venmo, an iPhone-based payment service is also down.

This is an update on Amazon’s Relational Database service.

8:12 AM PDT Despite the continued effort from the team to resolve the issue we have not made any meaningful progress for the affected database instances since the last update. Create and Restore requests for RDS database instances are not succeeding in US-EAST-1 region.

And this is one from the EC2 team.

8:54 AM PDT We’d like to provide additional color on what were working on right now (please note that we always know more and understand issues better after we fully recover and dive deep into the post mortem). A networking event early this morning triggered a large amount of re-mirroring of EBS volumes in US-EAST-1. This re-mirroring created a shortage of capacity in one of the US-EAST-1 Availability Zones, which impacted new EBS volume creation as well as the pace with which we could re-mirror and recover affected EBS volumes. Additionally, one of our internal control planes for EBS has become inundated such that it’s difficult to create new EBS volumes and EBS backed instances. We are working as quickly as possible to add capacity to that one Availability Zone to speed up the re-mirroring, and working to restore the control plane issue. We’re starting to see progress on these efforts, but are not there yet. We will continue to provide updates when we have them.

Update at 10:17 AM PDT: Here’s more companies affected by this outage, as offered by contributors to the comments below: ELog.com, a sort of all purpose-notepad in the cloud is down (link goes to a Google cache).

About.me, which AOL acquired last last year is down, and is currently displaying a message saying “We are currently experiencing an outage.”

ECairn, a social media marketing app says it’s down.

Travelmuse, a vacation-planning site is down, though I can’t find an official update on Twitter confirming that it’s connected to Amazon’s troubles.

Web host and design firm Drupal Gardens has an blog entry on its partial outage.

PeekYou, a search company that specializes information about people, tells me it has experienced some trouble, but has shifted its hosting to compensate.

Gamechanger.io, a service that tracks live baseball scoring stats, is down.

I’m beginning to understand what it feels like to be a radio announcer on a snow day reciting school closures after another! The only thing is, there’s no kids cheering.

Update at 10:39 AM: Yet more communication from Amazon, who says it is making progress.

10:26 AM PDT We have made significant progress in stabilizing the affected EBS control plane service. EC2 API calls that do not involve EBS resources in the affected Availability Zone are now seeing significantly reduced failures and latency and are continuing to recover. We have also brought additional capacity online in the affected Availability Zone and stuck EBS volumes (those that were being remirrored) are beginning to recover. We cannot yet estimate when these volumes will be completely recovered, but we will provide an estimate as soon as we have sufficient data to estimate the recovery. We have all available resources working to restore full service functionality as soon as possible. We will continue to provide updates when we have them.

And another concerning the relational database.

10:35 AM PDT We are making progress on restoring access and IO latencies for affected RDS instances. We recommend that you do not attempt to recover using Reboot or Restore database instance APIs or try to create a new user snapshot for your RDS instance – currently those requests are not being processed.

How did the community of analysts–who usually are pretty good about this sort of thing–miss their forecast of Intel’s sales by more than a billion dollars? How did they also miss Intel’s earnings per share by 13 cents? Is it really a case of what Intel CFO Stacy Smith referred to on a conference call last night as two blind people describing different parts of an elephant? Analyst Doug Freedman with Gleacher and Co. tried to explain it in a note to his clients today. He says two things contributed to the mass misjudgement.

First, everyone misjudged the number of chips consumed in the sales channel during the third and fourth quarters of 2010 ahead of Intel’s big launch of its latest Sandy Bridge generation of PC chips in January of this year. Having burned through their inventory of older chips, Intel shipped more of the newer chips than most people had expected, as distributors bulked up their stocks after cutting them down more than usual. Freedman says he thinks the same thing is still going on, which means that the guidance that Intel gave for the second quarter may turn out to be conservative.

Second, there was an extra week during the quarter. If you listened to the conference call, you heard several references to Q1 having 14 weeks. If you add a week’s worth of revenue–about $818 million–plus the additional revenue brought in by Intel’s acquisitions of McAfee and the Infineon wireless unit, which works out to another combined $496 million, you end up with about $1.3 billion, which is almost exactly the difference between the Wall Street consensus revenue number and Intel’s actual revenue.

Whatever the reason for the disconnect between the forecasts and the results, Freedman boosted his price target on Intel to $28 from $27 and maintained his Buy rating. Even so, other analysts weren’t quite so willing to change their stripes. Michael McConnel of Pacific Crest Securities, continued to insist that the slowing market seen by Gartner–who Intel’s Paul Otellini criticized in not-so-veiled comments during the conference call last night–will catch up to Intel sooner or later. Another, Stacy Rasgon of Sanford Bernstein, wrote that he’s not buying Intel’s story, period. Tiernan Ray summarized the day’s scorecard on revisions and recriminations by Intel analysts.

Whatever they said, Intel’s share price roared by nearly 8 percent to close at $21.41, the highest levels it has seen since March. Never mind all that pessimism from yesterday. Come on, analysts, it’s time to work your Emily Litella impersonations. Say it with me now: Never Mind!

Here’s a clip from Saturday Night Live circa 1975, courtesy of Hulu, to get you started. Better luck next quarter.

But there’s also a big specialized industry around the handling of detailed digital mapping data in what are known as Geographic Information Systems. Governments collect and store aerial and satellite images of important places to keep track of how they change over time and to help manage those changes. Businesses in a range of industries use the data to scope out new factories or to plan logistics. Power companies use GIS technology to map their grids, and wireless companies use it to build detailed maps of their tower infrastructure.

There is, however, one big problem with GIS data: The files are huge. Once you start collecting data, you can easily end up with terabytes worth of information. Typically, those files end up trapped on big servers out of reach of people who could actively use the data.

Beyond that, you usually need a lot of computing power to process the images. Stitching a bunch of aerial images taken of a town or county into a single image requires a lot of computing time and access to expensive and specialized tools. Plus you need someone with the expertise to work with the data.

Today Google announced that it is opening up its cloud infrastructure to companies and governments so they can put those files to use and basically build their own internal Google Earth applications. It’s called Google Earth Builder, and the basic idea is that you can upload, process and store your geospatial data in the cloud, and then put it to use in the familiar Google Earth and Google Maps interface.

Once in Google’s cloud, the data can be accessed from any Web-connected device, but you can also secure it so that if it’s proprietary data, only those who need to see it will, though it’s still easy to publish to the Web as well. Google handles the processing, which is a computing-intensive task. For instance, stitching several aerial images together into a single cohesive image is a pretty daunting job, but it’s one that Google’s distributed systems can make short work of. Then there’s potential savings to be had from not having to buy servers to store and back up the data.

Dylan Lorimer, product manager for Google Earth, told me that in the six years or so since Google bought Keyhole–the satellite imagery company that became the basis for the product–the company has built a deep well of experience and infrastructure around working with the peculiarities of GIS data. “We can process all these different kinds of data, whether it’s satellite or aerial imagery, basemaps, 3-D models, terrain models, we can process it on a massive scale, and we do it every day,” he told me. Here’s an interesting stat: Google processed and published 20 million square kilometers (about 7.7 million square miles) worth of high-res imagery for use on Google Earth and Google Maps.

One company that has been testing the service is Australia’s Ergon Energy, which used it to manage some of its GIS data. Another customer is the National Geospatial-Intelligence Agency, a U.S. defense group whose mission is to “Know The Earth, and Show The Way.” It provides what it calls “geospatial intelligence” to the military in times of conflict, and to civilian government agencies in times of disaster, like the Midwest floods in 2008 or the West’s wildfires in 2007.

It’s also a fairly large industry, and it looks like Google has its eyes on using its cloud infrastructure to try to upend it a bit. One study by a firm called Daratech pegs the size of the U.S. market for GIS and geospatial software and services at $4.4 billion last year and on track to grow to $5 billion this year.

Google plans to release the service in more than 100 countries during the third quarter, and hasn’t specified anything in the way of pricing other than to call it “competitive with other GIS products.” Seems like Google will be saying more on this subject soon.

But what if you’re a company who doesn’t always sell directly to your customer, but rather relies on a reseller who stands between you and the end customer? That’s a different dynamic entirely. And it may seem like an insignificant detail until you consider that there are more than $2 trillion worth of goods sold annually through indirect business-to-business sales relationships.

Companies tend to call these “channel sales,” or use some variation of that phrase to describe this aspect of their business. And it brings with it a level of complexity that’s different from conventional direct sales.

And as Mark Geene, the CEO of Channelinsight tells me, it’s a sector of sales that has yet to benefit from the kind of productivity gains that Salesforce.com and SAP have brought to direct sales. The company has created a cloud-based service that does two things: First it aggregates live data, including inventory and point-of-sale data provided by a network of some 5,000 business-to-business resellers, distributors and retailers. Then it combines that with some screening and analytics tools that can run either as a standalone application or as an add-on to Salesforce.com. You can see who bought your stuff, who the end customer was, whether or not incentives or other programs are working, and whether or not they have inventory in the right places given demand trends.

“Indirect sales have been sort of the stepchild of salesforce automation,” Geene told me. “It hasn’t benefited at all from the kinds of things that Salesforce and SAP have been doing.” Managing indirect sales is often a rather labor-intensive process involving a lot of time looking at spreadsheets. Channelinsight’s play is to automate that process.

It must be working. Customers include printer manufacturer Lexmark and the chipmakers Advanced Micro Devices and Nvidia, both of which sell a great deal into the channel, as well as the German industrial giant Siemens. That sounds like momentum.

Channelinsight just closed a $10 million Series C round led by Rho Ventures, with participation from Sevin Rosen Funds, Sequel Venture Partners and Vendanta Capital. Its total venture funding so far is $21 million. Paul Bartlett, a Rho Ventures Partner, is on Channelinsight’s board.

“Our expertise is in identifying and investing in companies that redefine the status quo,” Bartlett said in a statment. “Channelinsight fits this profile by reinventing the way channel sales are managed, saving companies millions of dollars in the process.”

Separately, Channelinsight said it added Ram Gupta, the former CEO of Cast Iron Systems, which IBM acquired last year, to its board of directors.

Geene is a former Oracle vice president who ran its mid-west sales, and has held senior management jobs at Tenfold and Dorado Software.

He told me one big problem companies often run into with indirect sales is screening for regulatory compliance–in particular the Foreign Corrupt Practices Act, which covers, among other things, bribery.

You may remember that last month IBM settled allegations by the U.S. Securities and Exchange Commission that it paid bribes to officials in China and South Korea during a period beginning in 1998 and ending in 2009. IBM never admitted to any wrongdoing, though as the SEC noted, the purpose of the payments was to “secure the sale of IBM products through IBM-Korea and LG-IBM’s business partners.” Hewlett-Packard had its own headache with bribery allegations in Russia last year.

This is the sort of thing that Channelinsight can help a company watch for, Geene said. “This is a big issue for any company that works with partners,” he said. “We screen every transaction that gets processed on our system, looking for red flags.” It also looks for instances where products might be sold indirectly via partners to countries that are subject to trade embargoes. This sort of screening is something that companies have till now generally had to manage manually with some sort of custom solution.

Intel CEO Paul Otellini criticized third party research firms–he didn’t mention any names, but he was talking about Gartner and IDC–for giving the idea that the PC industry is on the wane, when their information isn’t as complete as Intel’s is, especially in emerging markets.

While they’re forecasting the market to grow in the single-digit range this year, Intel sees the PC market growing in the low double-digit range, Otellini said, and he expects it to continue into 2012. “I want to be clear that our views differ from some of theirs,” he said. The PC market is getting more complex, and at nearly 400 million units sold per year, it’s bigger than it’s ever been. The research firms don’t see as much data as Intel sees. “While some channels–like PCs sold through consumer retail outlets in mature markets–have deep visibility, other channels, especially in emerging markets, are not well-reflected” in the forecasts from the research firms.

I wonder what Gartner and IDC are going to say in response to that? It seems Otellini has just called their research methods worthless.

Otellini also talked about a forthcoming announcement in May around manufacturing process technology. Having sold its first 32-nanometer processors at the start of last year, it’s time to start thinking seriously about the move to the next manufacturing node, and also the one beyond that. The next is 22 nanometers, and the one beyond that is 14, which should hit the market about 2013 or so. Intel says its going to spend between $9.8 billion and $10.6 billion in fiscal 2011 on capital expenditures as part of bringing up the new technology, and another $15.7 billion in combined research and development plus management and general costs.

Otellini and CFO Stacy Smith both talked about the implications of that shift, and both talked about some big announcements around process technology coming in May. “What we’re realizing is that competitive advantage is becoming very important,” CFO Stacy Smith said. “We’re getting paid both for differentiating, and in terms of pricing.” Pressing the manufacturing nodes forward–which is something Intel does better than anyone else in the world–will indeed give it an advantage not only over its distant rival Advanced Micro Devices in the PC world, but also give it a better chance of combating the persistent competitive threat from ARM chips that not only rule the world so far in smart phones and tablet, but which are starting to show up in mobile PC roadmaps.

Otellini said while demand for PCs among consumers in the US and Western Europe remained soft, demand was strong in emerging markets. Demand for servers–the big surprise of the day–and PCs at business were also strong. He also said that Intel recovered quickly from the design flaw discovered last month in the Sandy Bridge family of chips. He also said that Intel sustained some damage to sales and marketing offices in Japan, but “nothing major that would hinder our ability to service our customers.” Intel is seeing no disruptions in its supply chain as a result of the earthquake there.

He talked at length about Intel’s sales to cloud providers, calling it a “major driver” of the company’s growth. Sales in the Data Center Group grew 32 percent year on year and were led, Otellini said, by sales in China. Sales of Intel chips into storage systems were also strong, up 45 percent over last quarter and 65 percent year over year.

My liveblog from the conference call–joined just a few minutes late–is below.

2:40 pm: Joining a tad late after a technical glitch. Intel CEO Paul Otellini is talking.

Our views differ from the views of the analysts. The PC business is a global industry, it is 400 million units a year. Some channels, especially those in emerging markets, aren’t very visible to research firms. Basically he’s slamming IDC and Gartner for their pessimistic views. “Our projection for 2011 remain in the low double-digit range.”

“We see no reason for 2012 to be materially different from what we see in 2011.”

He says to expect an increase in Capex around the 22- and 14-nanometer manufacturing technology. “We see a need for more features [on chips],” he says.

CFO Stacy Smith is now talking.

The company fixed the Cougar Point problem–referring to the “design errors” found on a chipset accompanying the Sandy Bridge processor–and completely mitigated the revenue impact that was expected.

2:44 pm: First quarter significantly better than our expectations.

Sandy Bridge boosted average selling prices.

Acqusitions of McAfee and Infineon wireless business added about $500 million of the $2.5 billion in new revenue seen year over year.

The Cougar Point impact to gross margin was about 3 percentage points. That explains the 1 percent quarter on quarter drop on that important figure.

First quarter puts us on track to exceed financial goals for the year. Expect another year of double-digit revenue and earnings growth.

We are making some critical investments in process technology that will have a very rapid ROI or return on investment.

Q&A is getting started.

2:48 pm: Glenn Yeung from Citi: Help us understand the emerging markets and growth seen there.

Smith: Emerging markets are well over 50 percent of business. The dynamic is one of economics. Desirability of the technology is high and affordability is high. The price point of a PC is within 1-2 months of income. Penetration rates are so far pretty low.

Otellini: My comment on the channel strength for Sandy Bridge is emerging markets. Most of the machines sold with Sandy Bridge are white boxes in emerging markets. Those markets are still surging in terms of notebooks.

2:50 pm: Yeung with a follow-up. He’s asking about the investment in process technology. Otellini used the word “revolutionary” to describe the 22-nanometer leap that’s coming. He’s asking him to shed some light on what he means by that.

Smith: The Capex number is driven by a few things. Unit growth and ability to meet demand at 22-nanometer and 14-nanometer technology. It give us performance cost and power efficiency advantages. The biggest single chunk of the Capex is with the development fab for 14 nanometer, we’re going to make that fab bigger. That will allow us to bring more products to 14-nanometer technology and ramp it faster.

Otellini: On the process technology, only a teaser today. We’ll be disclosing that technology in early May. When you hear that announcement you’ll understand why that phrase is appropriate.

2:52 pm: Question about how we should think about seasonal trends in the second half of the year.

Smith: We closed McAfee and Infineon, and they added half a billion in Q1 and should add another half a billion in Q2. The second quarter is usually kind of flat compared to the first, which is in line with the pattern we’ve seen over the last five years. We’re not seeing anything that would cause it to be any different than before. Second half tends to be about 2-3 points higher than the first in terms of revenue.

Otellini says to expect to see a lot of tablets with Intel chips demonstrated at Computex. Google’s Android Honeycomb source code will ramp over the course of the year for a number of customers.

Losing Nokia, Otellini says, “took a lot of wind out of our sails” around landing Intel chips in smart phones. Intel has redeployed resources from that. “I would be very disappointed if you didn’t see Intel based phones 12 months from now.”

2:56 pm: Question from BMO. For the total PC market, what is the percent the third parties companies are missing?

Otellini: They are all over the map. Gartner is at 6 and IDC at 7 percent growth for the year, and we’re seeing low double-digit growth.

Q: What about Medfield, the phone processor. What are the metrics that are getting customers interested in it? Is it the fact that you’ve been able to make it competitive with ARM chips?

Otellini: Its both. The product is very good in terms of performance, especially in media processing. And the power envelope is right where you want it to be.

2:58 pm: Question from UBS: You called out storage as up 45 percent within the Data Center Group. We’ve seen this group grow faster than we thought. What’s the longer term growth?

Otellini: We recognize that this group has had phenomenal growth. Expect a deep dive on that at the analyst meeting and on the market for Xeon class chips today and tomorrow. (No mention of Itanium-based servers, by the way. -ed.) Traditional servers, we’re out-growing the market by a factor of 2-3x. We think a big piece of the market is high performance and cloud, and the conversion of other parts of the data center from proprietary to Intel-based designs, you see growth that is representative of all the growth of the Internet. We’re benefiting quite well.

UBS asks about the transition from 22 nanometers to 14 nanometers. Is there anything that is driving the speed now in terms of moving to 14 nanometers and what can you do at 14 versus 22 nanometers?

Smith: I’m going to punt for another few weeks. More to say around 22 nanometer and the secret sauce there, and it will carry into the 14 nanometer node.

What we’re realizing is that competitive advantage is becoming very important. We’re getting paid both for differentiating and in pricing. As we get out to 22 and 14, we’re going to bring capabilities to process technology more quickly than we have before. 22 nanometer will intercept with smart phones and notebooks more quickly, and we’ll get paid for performance and cost over the long term.

3:03 pm: Chris Danely of J.P. Morgan asking about factory utilization rates. He wonders if there may be shortages coming.

Smith: We’re running not too hot, and not too cold. Not anticipating shortages. We have responsibility to respond if demand is hotter, and if demand is less, we now have the tools to respond to both circumstances.

Danely: It seems as though perhaps some of the OEM customers have a more tempered forecast. What’s the difference?

Otellini: We won’t characterize specific customers. I think those who are more enterprise centric than those who are focused on consumer markets in the U.S. and Europe are seeing numbers closer to ours.

Smith: The elephant looks very different depending on what part you’re looking at. Mature markets look tough. Emerging markets look pretty good.

3:06 pm: Question about how much Sandy Bridge accounted as a percentage of sales.

Otellini: Doesn’t want to get into that level of granualarity. He calls it the fastest manufacturing ramp.

Smith: More than 50 percent of my CPU inventory is Sandy Bridge. That’s a good indication of the next few quarters.

3:07 pm: Smith says he’s seeing a little upward tick in component costs, including some impact from Japan.

Average selling prices have a very rich mix. Sandy Bridge ramped at a higher end of the price range, and the mix is going to come down a little.

3:09 pm: CLSA Securities with a question: What’s driving the demand? Is it Windows 7 on corporate PC?

Otellini: In the middle of last year we saw the market recover. The most recent data we have is that 75 percent of enterprise PCs are running WIn XP. If you think about a 3-4 year refresh cycle, we’re not even halfway through it. The combination of the Win 7 machines look good.

Question from Goldman Sachs: If I think about this third-party data issue. Is the Gartner and IDC data really off by 20 percent?

Smith: That misses how much inventory levels came down in the fourth quarter. We were worse off than seasonal. There was a significant bleeding off of inventory ahead of Sandy Bridge release. When we go off and do our looks across the channel we see inventory levels being healthy, and that says something about the health of the supply chain.

Q: That’s a little different than just the third-party data is wrong. Is it just really off?

Otellini: The comments I made were on third-party data year on year. I think our experience is that on an annual basis our numbers are closer than theirs. They correct over the course of the year to be aligned.

Smith: When I talk about Q1, you also can’t lose sight of the fact that Q1 was a 14-week quarter.

3:14 pm: Hans Mosesmann, Raymond James asks about the foundry strategy. What part of the incremental capex is part of that?

Smith: It’s not a driver of our capex. We’re interested in talking to some very specialized companies. We’re not building a broad-based foundry business, and it’s not part of our capex number.

Otellini again teases about a forthcoming announcement on process technology.

3:19 pm: Question from Credit Suisse: Asking about the weakness in consumer sales in the U.S. and Europe. Is it because of tablets?

Otellini: It’s a little bit of everything. Add one more thing. In 2009 and in the first half of 2010, consumer market for notebooks was strong contrary to GDP at the time. I think people bought a lot of machines and we’re just early in the cycle. A consumer refresh isn’t what you’d expect in a mature market right now. Clearly some tablet cannabilization is impacting that. But the bigger impact is macroecononomc.

Q: What inning are we in in the enterprise upgrade cycle?

Otellini: Top of the fourth, three on, no outs.

3:22 pm: Question about notebook and desktop mix going into Q2.

Smith: What we saw was an inventory burn in Q4 that led to units being slightly above seasonable. Q2 looks pretty seasonal.

Q: What do you expect of total wafer production in 2011? Is it consistent with PCs?

Smith: Wafers will grow faster than total available market as we move to the new process.

Craig Ellis, Caris and Co. asks: Are you expecting any change in the mature markets for PCs?

Otellini: I don’t think it has to happen. We don’t build it into our numbers.

Now a question about design wins on the tablet front, and what OS Intel will be stronger on versus others.

Otellini: I don’t have an update. We’ll do a number count on May 17. It’s 35 or so. The bulk of the units this year will be Android-based.

3:28 pm: That’s a wrap. We’ll see you back here for Q2 results on July 20.

The company reported sales of $12.9 billion, up 25 percent from the same period a year ago, and per share earnings of 59 cents, up 37 percent from last year, pummeling the consensus Wall Street view that called for sales of $11.6 billion and earnings of 46 cents per share. Gross margin–a closely-watched indicator of profitability–was down slightly versus the year-ago period at 62 percent. The company generated $213 million in cash from equity investments in other companies.

The results were led by sales in the Data Center group, which specializes in selling chips for use in servers used in data centers operated by large corporations and cloud computing service providers, which grew 32 percent over the year-ago quarter. Sales in the PC group grew 17 percent, despite reports from market research firms Gartner and IDC last week suggesting that sales of personal computers are slowing in the face of stiff competition from tablets like Apple’s iPad.

Equally strong was Intel’s guidance for the second quarter. The company said in a statement it expects revenue of $12.8 billion plus or minus $500 million, and for gross margins of 61 percent plus or minus two points. That exceeded the current analysts’ consensus by nearly $1 billion.

Intel shares surged in after-hours trading by as much as 7 percent at one point and were $20.68, up more than 4 percent by 1:17 PM Pacific Time.

For openers, the first quarter of the year is always the one that’s seasonally slower, as consumer PC sales slow down. And they are, as we saw in the latest estimates from Gartner and IDC last week. Of the $43.6 billion in sales Intel reported in 2010, nearly $25 billion or 57 percent of sales was derived from the sale of microprocessors into PCs. Add in another $6 billion and change for sales of chipsets and motherboards and Intel’s exposure to PCs jumps to 72 percent. By comparison, its Data Center segment, which sells chips used in servers, accounts for $8.7 billion or less than 20 percent of sales. If the PC market is slowing, then it’s hard for Intel not to slow down. However, its technology, its market strength versus rival Advanced Micro Devices, and its best-in-the world manufacturing efficiency allows it to roll with whatever punches the marketplace throws. Plus, Intel does a lot of business with Apple, which continues to boom.

For today’s report the focus will be less on Intel’s results–unless there’s a surprise–than on what Intel says about its guidance for the second quarter. The consensus view of analysts calls for Intel to report Q1 sales of $11.6 billion, which would be a year-on-year increase of 12.6 percent, and 46 cents in per-share profits versus 38 cents a year ago. The consensus view on Q2 calls for $11.87 billion in sales and a profit of 45 cents.

Here is where the analysts start parting company with each other. Hans Mosesmann of Raymond James passes for an Intel bull, seeing Q2 sales at $12 billion and profits at 49 cents. He argues that after accounting for Intel’s acquisitions of McAfee and the wireless chip unit of Infineon, if Intel issues guidance that is in line with seasonal exceptions (Q2 is usually a slow quarter for consumer PC sales as well), that would be a sign that most everything is on track.

There are other optimists out there, some more cautious than others. Take last week’s note from Doug Freedman at Gleacher and Co. He reminded clients that Intel had to fix a manufacturing glitch with its Sandy Bridge chip, one that caused some PC shipment schedules to slip. Though Intel made short work of the problem, Q1 ended “weaker than expected,” he says; he forecasts microprocessor unit sales to fall by 8 percent from Q4, which is in line with seasonal patterns. He expects Intel to report sales of $11.7 billion and a per share profit of 48 cents, but has a more positive outlook on Q2, with sales at $12.2 billion and profits at 49 cents.

Then there are the pessimists. Michael McConnell at Pacific Crest Securities says the consensus numbers are too high, and trimmed his own expectations. He’s calling for Intel to miss, with sales at $11.6 billion. Between the Sandy Bridge problem, the earthquake in Japan, and the acquisitions, there are “too many moving parts,” he says, for Intel to hit its numbers, let alone beat them. Despite relatively strong sales of chips into notebooks and a slight rise in the average price that PC makers pay for those chips, McConnell writes that Intel’s implied guidance for a decline of about 7 percent in chip sales is “likely to prove optimistic.”

Moreover, he sees Q2 estimates at too high as well. First of all, the quarter is at 13 weeks, one week shorter than Q1. Second, the ramp-up of PC makers turning out machines with the Sandy Bridge chip isn’t enough to offset other factors. He expects Intel sales in Q2 to hit $11.7 billion. Overall, he expects Intel to grow its core PC business by only 6 percent this year, well below Intel’s projection. We’ll see how it all shakes out later today. Check back this afternoon. I’ll be covering Intel’s results and the conference call.

Hogan will be the second high-level exec to exit in as many months, following word last month that chipmaker Advanced Micro Devices had poached Michael Wolf, HP’s former VP for information technology as its new CIO, and it’s the latest departure from HP’s senior ranks amid the unfolding management shakeup that started when the company named Léo Apotheker as its CEO.

HP named Jan Zadak (pictured), managing director for HP Europe, the Middle East and Africa (EMEA), as Hogan’s replacement, starting May 1. Zadak came to HP by way of its acquisition of Compaq, having joined that company in 1997. He held several senior management roles in the Europe, Middle East and Africa region, including stints in Central and Eastern Europe. Zadak, who appears in a video below shot in 2008 at an HP event in Barcelona, is a native of the Czech Republic. Before Compaq he spent five years working for Olivetti.

PREVIOUSLY:

• AMD Hires Its New CIO Away From Hewlett-Packard
• Apotheker Sets Hewlett-Packard on a Cloud-Centric Path
• Léo Apotheker: Hewlett-Packard Will Build a Cloud
• HP’s New CEO Has a Big Day Planned, and a Bigger Job Ahead
• Another Advisory Firm Singles Out HP Director Babbio
• Shareholder Group Contends HP’s New Board Is Too Chummy
• “Peripatetic Polyglot” Léo Apotheker Wants to Save HP’s Soul by Buying Software Companies
• HP Earnings Today: Will Léo Apotheker Speak?
• Michael Dell Thinks HP Paid “Way Too Much” for 3Par
• Judge: HP Can Re-Investigate Hurd Departure
• Is This the HP Board That Will Allow Us to Stop Thinking About HP’s Board?
• Meg Whitman, Patricia Russo Among Five Joining HP Board
• HP Plans Another Probe Into Hurd Departure
• Léo Makes It Official: SAP’s Bill Wohl Joins Hewlett-Packard
• Want Enterprise Growth, HP? Think Services
• Mark Hurd Really Wants to Keep the Jodie Fisher Letter Private
• Mark Hurd Doesn’t Want You to Read the Letter That Cost Him His Job
• HP Networking Head: “People Are Tired of Paying for Cisco”
• HP Names Ex-SAP Chief Apotheker as CEO

Analyst Chris Whitmore with Deutsche Bank Securities previewed the quarter in a note to clients this morning, and said he thinks IBM closed the quarter on the strong note. While the consensus calls for IBM to report $24 billion in sales and per-share earnings at $2.30, Whitmore is slightly more bullish than the Street on revenues–at $24.1 billion–and less so on earnings–at $2.24.

Checks indicate that IBM’s Power-based systems are taking business away from servers using Oracle’s Ultrasparc-based systems, the server business it took over when it acquired Sun Microsystems last year, though we heard nothing about that from Oracle when it reported earnings on March 24. On top of that, Whitmore foresees strength in the services business, and expects that IBM will report service signings in the range of $12 billion to $12.5 billion.

One headwind to watch: Japan. IBM derives about 10 percent of revenue from Japan and could take a hit on its results following the disastrous earthquake and tsunami that devastated that country last month, Whitmore says. Strength in other areas of the world may offset any weakness in Japan. “We expect management to duly update investors as to what, if any, impact these factors would have on IBM’s results going forward,” he wrote.

Whitmore expects revenues to grow a little more than five percent companywide, which includes a little help from currency rates. He says hardware and software sales both should grow 10 percent year on year, while services will show growth of less than 3 percent. Maybe the strength has something to do with all the publicity generated from winning at “Jeopardy” two months ago.

A few other points to watch: Deals. IBM publicly announced only four deals this quarter versus seven in the year-ago quarter, and only one was valued at more than $100 million. With so little data, it’s hard to get a solid feel for services bookings, Whitmore says, though he expects the bookings figure to track largely with the consensus.

(Image via from an 1980 IBM Poster designed by the late Paul Rand.)

This will certainly trigger talk of a showdown in the cloud between Microsoft and Google, whose Google Apps service is trying to win business from large enterprises, including big companies and government agencies. And in some cases the competition between the two has gotten ugly.

Google, you may remember, is suing the Department of the Interior, saying they were improperly excluded from bidding on a big project to provide cloud-based office and collaboration software–after Microsoft won the contract. Microsoft has accused Google of not having the right security certifications for doing business with the federal government. Google slapped back, saying Microsoft didn’t know what it was talking about.

Whatever. The point is, starting today, you can try Microsoft’s cloud-based version of Office for yourself. Still no word on when it will be ready for prime-time. I took the opportunity to subject Ron Markezich, corporate vice president for Microsoft’s U.S. Enterprise and Partner Group, to the Seven Questions treatment. We talked about the state of Microsoft’s cloud application and service offerings, including not only Office 365 but also BPOSS, its Business Productivity Online Standard Suite, which includes a cloud-based version of Microsoft Exchange, SharePoint and other applications. And yes, during the conversation, more swiping at Google–as well as a little at IBM–occurred.

NewEnterprise: Ron, when I think of Microsoft, I think of Office. And when I think of Office, I see it as a box of software that I have to schlep to the a store to buy in a box. I tend not to think about it as something I can get in the cloud. When did Microsoft start thinking about moving its multi-billion dollar software franchise to the cloud?

Markezich: My background is that I’ve been at Microsoft for 13 years. Prior to this I was CIO. And about six years ago Bill Gates and Steve Ballmer called a meeting and said the future of our company is selling our software over the Internet. They wanted to take the operational folks in IT and put them in engineering in order to really combine this online service delivery of our software. And really that was the beginning of what we now call BPOSS and now also Office 365. Six months after that meeting we signed up our first customer, which was Energizer, the battery company, and we serve them today, globally. I soon moved out of the CIO role and into engineering, and built this business based on our traditional software, as the engineering teams re-architected our software like Office and Sharepoint for the cloud.

So who are your customers? And who–obviously Google is one–do you see as your competitors?

If you look at just where we stand now, we have the best set of clients you could ever hope for: Glaxo SmithKline, Ingersoll-Rand, Coca-Cola, Kraft, McDonalds. These are customers who aren’t just using bits and pieces of the cloud. I think its getting hard to tell who’s a customer and who isn’t. In some cases you don’t even have to pay for these services. You might have two or three people inside an organization using the service. But these are all cases where the entire company has moved to BPOSS. They are using it across their entire work force.

As to competitors, I think Google gets a lot more press because it’s a lot more fun to write about than Microsoft and IBM. It surprises me how much Google is visibly going after the enterprise. Frankly it’s nowhere near ready to go after the enterprise. Google throws out a lot of customer references. But when you sign Google’s contract you give them the right to use your name as a customer reference, regardless of how many seats you buy. Our default is we can’t use your name unless we get your permission. In reality we don’t see Google as getting that much traction. If you look at where we battle more in the enterprise, it’s against IBM on Lotus Notes. And so about two thirds of our seats in the enterprise are coming to us from Notes. We see more of a fight there with IBM trying to hold on to their Notes base.

The fact is, Google just isn’t ready for these types of customers. If you go to the RFP [Request for Proposal] and look at all the requirements, there’s many that they simply don’t meet. I think they want to be given a fair shot but they’re really not ready.

What makes Google not ready?

They’re taking a consumer service and trying to provide that to businesses, and architecturally there are a lot differences. As a consumer you probably don’t ask where your data is going to be stored. That’s the first question an enterprise customer asks. They ask what countries their data is stored in and where that data flows. We take our data flows and we make them available to customers. We tell them where and how its stored and what the circumstances are where it can be accessed from outside of that country and moved outside of that country. You’re just not going to think about those things with a consumer service. But it’s one of the reasons that we don’t use Hotmail, for example, as an enterprise service. Hotmail wasn’t built that way. Their mail service is built right on top of GMail. In fact what you’re paying for is support, but even there they fall short. They don’t have the kind of service level agreements that we do. I’d love to be a fly on the wall inside Google right now, because they’re probably sitting back and saying “Wow, this enterprise IT stuff is a lot harder than we thought.” It’s not easy, and the demands are high.

So what are customers telling you? Where are they hurting and what do they need?

Every customer loves the cloud. In fact, a lot of customers are embracing the cloud because their CEO is hammering them, asking for it. But it’s dangerous. What people love about the cloud is the fact that they don’t have to worry about upgrades, they don’t have to worry about hardware, and they don’t have to do a big capital investment. The flip side is that as a customer you’re now one voice of many, and a lot folks don’t realize what that means in terms of support and feature requests. One customer doesn’t get prioritized over another. The other thing is the sense of control. When you’re running everything yourself, you know exactly what’s going on. In the cloud, you’re running with thousands of other customers and you have to rely on the provider to let you know what’s going on. Some customers love it. Some struggle with it at first until they realize, for example, that they’re benefiting from the scale.

I realize this will vary case by case, but by and large, what are customers saving on per-seat cost?

I was with one customer last week who told me they’re saving 50 percent from what it cost him to run Exchange in his data center to running Exchange online. Typically, what we see are customers saving in a range of 30 to 50 percent. We usually see those who come from Lotus Notes save 50 percent. Notes is a little more expensive to run. But this customer was a Microsoft customer saying he saves 50 percent. We’ve also had customers say they’re breaking even, but they’re breaking even with better availability, and with geo-redundant data centers. But the bulk of them fall into that 30 to 50 percent range.

I know what your customers’ pain point are. What are yours?

Once customers move to the cloud they want more stuff, faster. I always liken it to running. The hardest step to take is the first one out the door. Once you get out the door everything is easier. With the cloud, once you take that first step and move a mission-critical system to the cloud, you’re kind of there and you want to move everything to the cloud. So they want Windows Intune faster, they want Microsoft Project faster. I was with Coca-Cola recently, and they said they wanted to do everything they did with Office 365 and do it with everything else. And so keeping up with that portfolio of additional cloud services is tough, and launching a cloud service is not easy. There’s a lot of engineering work, then you have to work out the support model, the regulatory aspects, and the certifications. All of these are things we have to work through before we launch a service. Then you launch and customers want more features. So our big challenge is keeping up with the appetite that our customers have for more services.

With this you’re making fundamental changes to how a key Microsoft franchise that has brought in billions upon billions of dollars is sold. Can this new model ultimately catch up with and supplant the old one?

It’s even more than that. We’ve made a version of Office that anyone can use online for free. But as a business model we see this as something that can be beneficial to Microsoft in a couple of ways. One, every customer that has bought BPOSS, we see their total software spend with Microsoft go up. Even that customer I told you about that saved 50 percent, they still are spending far more than they did before. For one, they were just buying Exchange Client Access Licenses. Now they’re buying Exchange CALs, plus spending some money for the service. Now we don’t make as much profit margin, but we make some profit margin on that. But the biggest reason is that most of the time, they buy other things from Microsoft. They buy new versions of Office, they might be buying Active Directory if they didn’t have it before. They might not have had Sharepoint or Lync, and now they’re buying those. So every one of these customers, we see their total spend with Microsoft go up anywhere from 2 to 6 times what it was before. The other thing is that if you look at the total industry spend, most of it is on activities where there’s no value added. Every dollar you spend on software from Microsoft, you spend $6 trying to get it to do anything. What we’re trying to do is drive that six dollars to zero.