Bill Gates' $160 Billion Nightmare: The Cloud That's Raining on Microsoft's Parade

Bill GatesBy Austin Edwards, The Motley Fool

What terrifies a man as smart and successful as Bill Gates? Just two words, it turns out.

Some say these two words keep him up at night. Others claim they are the real reason for his early retirement. Still others assert that the concept behind these words is a bigger threat to Microsoft (MSFT) than Apple (AAPL), Amazon (AMZN), and Facebook combined.

The two words that upended Bill Gates' world? "Cloud computing."

It Begins on Oct. 30, 2005 in Redmond ...

Bill Gates knew the world he created was in danger of being upended, and on a gray autumn afternoon he sent an urgent memo to his top engineers and most trusted managers.

It sounded the alarm that a disruptive "wave" was about to wash over the entire world, forever changing the way we get information and do business. It also warned that this could wipe out the $300 billion empire he'd spent his life building.

It was happening a few hundred miles south, on the banks of the Columbia River. A mysterious outfit known only as "Design, LLC" constructed two massive, windowless warehouses -- which the International Herald Tribune described as "looming like an information-age nuclear plant."

Inside those monoliths, the "wave" Bill Gates feared was being built under the code name "Project 2."

Today, "Project 2" -- or "cloud computing" -- is a $160 billion tsunami. And experts say it will capsize a $1 trillion industry.

Same Story, Different Century

For an eerily similar tale, step into the time machine. On Feb. 28, 1881, a British stenographer named Samuel Insull arrived in the port of New York, hired by Thomas Edison's chief engineer to serve as Edison's private secretary.

Insull knew the model Edison had created was flawed. He got his chance to unleash his "wave" -- to change the trajectory of the electricity industry -- when, after overseeing the merger that created General Electric, he was offered the presidency of the Chicago Edison Company.

At the time, cities like Chicago had dozens of small, privately owned power stations transmitting direct-current electricity to nearby neighborhoods. Insull envisioned a centralized serving center -- akin to today's "cloud" -- that would do away with the inefficiencies of the one-station, one-neighborhood model.

Little did anyone know that the world of electricity was about to change drastically.

How to One-Up Thomas Edison

Insull's vision was to create a "utility" by building giant central power stations that would transmit alternating-current electricity over great distances. These power stations could be linked to form a giant grid that would serve homes, businesses, and industries in even the most remote locations.

Because these utilities could match supply with demand, realize economies of scale, and use their capacity more efficiently, they could deliver electricity at a fraction of the cost.

He was right on the money: By 1907, utilities produced 40% of the power in the U.S. In 1920, that number stood at 70%, and a decade later, it was over 90%. And what was once unimaginable suddenly became reality.

Mr. Insull Goes to Silicon Valley

Insull transformed Edison's legacy into something greater and more efficient than its creator had imagined. Today's visionaries are doing the same.

Remember when computers took up entire rooms and were used for mathematical calculations? Then Intel (INTC) unveiled the microprocessor, and a geeky college dropout started writing software with his former high school pal. PCs replaced the mainframe. Companies began building interoffice networks for employees to run programs like Microsoft Office and access files or printers from a central server.

But, like Edison's, Bill Gates' model was far from perfect.

PC networks were inefficient. Every time a company needed a new application, it had to expand its data centers, reprogram old systems, and hire technicians.

As a result, global IT spending jumped from under $100 billion a year in the 1970s to over $1 trillion by the turn of this century. IT consulting firm IDC reports that every dollar a company spends on a Microsoft product forces $8 more of IT expenses.

Expensive and inefficient -- just like Chicago's unlinked power stations.

Enter the Cloud

It was only a handful of years ago that access to new programs required that you buy and install all-new software. Today we look up restaurants on Google (GOOG), find directions on MapQuest, watch videos on YouTube, and sell furniture on Craigslist -- and all we need is an Internet connection. Now none of that content is even stored on your computer.

Thanks to the thousands of miles of fiber-optic cable laid during the 1990s, the speed of computer networks caught up with the speed of the computer processors. Computers that were once isolated are now linked in a giant network, or "cloud."

Like electricity, cloud computing isn't just a modern convenience -- it's becoming an enormous industry. Everyone from individuals to multinational corporations can now simply tap into the "cloud" to get all the things they used to have to supply and maintain themselves.

As a result, computing is fast becoming a utility in much the same way that electricity did. And most of us don't give any of it a second thought -- just like you don't think twice about where the electricity is coming from when you plug an appliance into the wall.

This shift will save some major companies millions -- and will make smart investors billions. Three companies in particular are on the forefront of this massive shift. (Click here for an in-depth presentation about these companies and the explosive new industry.)

As IT expert Nicholas Carr explains, "What the fiber-optic Internet does for computing is exactly what the alternating-current network did for electricity." Even Bill Gates now admits that "the next sea change is upon us."

Motley Fool contributor Austin Edwards owns shares of Apple and Google. For more on the three companies Motley Fool stock analysts say are leading the charge in the post-Microsoft world, see our free in-depth video report. The Motley Fool owns shares of Intel, Google, Microsoft, Amazon.com, and Apple. Motley Fool newsletter services have recommended buying shares of Intel, Google, Apple, Amazon.com, and Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft and Apple.


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