Customers and service providers squared off Thursday over the pros and cons of cloud computing at the Enterprise Cloud Summit panel at the Interop conference in New York City. The session was moderated by TechWeb chief content officer David Berlind.

The panelists' consensus was that the cloud holds big promise for organizations looking to cut costs, boost efficiency, and add flexibility to their IT operations, but significant problems need to be solved before the architecture goes mainstream.

Under cloud computing, enterprises tap applications and services from remote servers maintained by a third party. A number of tech vendors, including major players like Google, Amazon, and Microsoft, have jumped into the market, along with startups like Joyent.

Cloud computing's main advantage, advocates say, is that allows customers to effectively share computing costs with hundreds, or even thousands, of other organizations while still maintaining the privacy and security of an in-house data center. "It radically lowers costs," said Don Dodge, developer advocate at Google.

The cloud model also lets enterprises quickly ratchet up computing power as needed, or dial it down—depending on market conditions and other factors. "It's better, faster, and cheaper," said Jason Hoffman, founder and CTO of Joyent. Indeed, Yousef Khalidi, distinguished engineer for Microsoft's Azure cloud OS effort noted that capacity utilization in a typical corporate data center is only about 15%, meaning there's significant waste.

The cloud architecture also offers an accounting advantage in that IT costs can be converted from fixed, capital expenditures to variable operating costs. "You're basically outsourcing your IT infrastructure," said Adam Selipsky, VP for Amazon Web Services.

It's hardly surprising then, that a number of major organizations, including Eli Lilly, Netflix, ESPN, and the cities of Los Angeles and Washington, D.C., have moved a good chunk of their computing operations to the cloud.

Still, not everyone is ready to jump aboard. Interop panelists representing the customer side of the industry voiced concerns about cloud vendors' ability to handle regulatory compliance, security, and interoperability.

John Merchant, assistant VP at The Hartford, noted that insurers must comply with numerous rules around financial, healthcare, and personal data. "How can I be sure you can comply with all those regulations?" asked Merchant.

Similarly, New York State Deputy CIO Rico Singleton pointed out that public sector agencies operate under strict constraints regarding where and how citizens' information is stored. "My concern is from a legal standpoint," Singleton said. "We have some serious legal concerns with the public cloud," he added.

Singleton said state and federal agencies would most likely be more interested in operating their own, private clouds rather than handing off sensitive data to a vendor.