Large software companies are a special kind of business where their investment in existing code becomes a larger and larger drag on how fast they can move and what they can do next. The advent of cloud computing challenges big companies to change. Watching Oracle and Microsoft respond offers a study in contrasts.This is a tale of two companies. We are at a very early stage of moving some limited IT function outside the traditional data center and into the cloud, in most cases, a public cloud such as Amazon Web Services EC2. The prospect of this change is disturbing to existing software vendors who make their money on selling packaged software to be run in-house.

Customers prefer to pay less for occasional use of software in the cloud than they do for lifetime licenses on premises. The cloud conditions customers to think in low hourly rates or other metrics disruptive to package pricing. If they are willing to pay, it's hard to know what to charge them for use of software in the cloud and remain competitive with newcomers who come along and want to be cloud software vendors too.

Microsoft has insisted that a copy of Windows running in a virtual machine in the cloud and perhaps only using one core of a multi-core, multi-CPU server, is still a Windows license that needs to be purchased. It has reached agreements with Rackspace, Amazon Web Services and other cloud suppliers for them to provide Windows Server instances and we can infer from the 12 cents per hour that Amazon charges for a Windows server vs. 8.5 cents an hour that it charges for a Linux server that the 3.5 cents more for Windows accounts for much of the cloud license price.

If that Windows server runs continuously for three years at 12 cents an hour, it yields $3,153.60, with Microsoft's share presumably 3.5 cents an hour or $919.80. Not bad, but public cloud users a least at this stage tend not to run their servers continuously. They tend to use their servers in spurts, paying by the hour of use.

Or if the cloud user does run it continuously, he opts for an upfront prepay plan that cuts the cloud's per hour price roughly in half. That would lower the yield to $459.90. You can begin to see why the cloud tends to act as a discount off the list price. A new copy of Windows Server 2008 has a list price closer to $1,500-$1,600. A business purchaser might use it for five years, but pay annual maintenance fees to Microsoft. It's hard to know what cloud vendors pay in maintenance, if they pay it at all. A direct cost comparison is difficult to do.

Nevertheless, cloud use tends to train customers to a different metric of payment and erode list prices. So how should a big software company react to the challenge posed by cloud computing?

Oracle CEO Larry Ellison's reaction is well known. He tends not to think too much of cloud computing and as recently as the announcement of the Sun acquisition fulfillment Jan.27, he denounced the cloud as a misnomer and pretender to powers that it did not possess. He challenged a roomful of several hundred members of the analyst corps, press, partner vendors and other interested parties to contradict him and no one cared to step forward to the microphone to question him or challenge his assertion.

At the Churchill Club in San Jose Sept. 22, he was even more emphatic. "All 'cloud' is is a computer attached to a network with databases, operating systems, memory, microchips. All of a sudden it's 'The Cloud.' What is the cloud? The cloud is water vapor… Change 'cloud' to 'Internet' and give it back to those nitwits on Sand Hill Road," he said at that event.

Ed Zander, former president of Sun Microsystems and CEO at Motorola, Ellison's interviewer at the Churchill Club, seemed taken aback by the vehemence with which this statement issued and didn't really follow it up.

The only Oracle employee that I've seen speak directly in favor of the cloud in public was software architect William Vambenepe at Cloud Connect in Santa Clara March 17. I find it strange that so many knowledgeable Oracle employees remain silent on cloud computing except the one whose native language is French.

I contrast the top level Oracle reaction to that of Microsoft, which 2-3 years ago, could easily have been described as worried about software as a service and the impact of other forms of cloud computing on its packaged software revenues. In a short space of time, CEO Steve Ballmer has insisted that the company refocus its energies and get the cloud into its big picture.

In early March, Ballmer said publicly that 70% of Microsoft employees were "doing something that is designed exclusively for the cloud or is inspired to serve" one of Microsoft's five cloud initiatives. "By a year from now, that'll be 90%." At another point, he made it clear, "We're all in on the cloud."

And that was already evident from the strategy and thinking evident at Microsoft's Professional Developers Conference in Los Angeles last November. The company seemed to be turning on a dime, going from disbelief and reluctant acceptance to a full embrace. One of these days Larry Ellison is going to have to eat his words on cloud computing. If he doesn't, he's going to find Microsoft eating his lunch -- in the cloud.

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