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Google's Focus Is on the Cloud

NEW YORK (TheStreet) -- Google (GOOG - Get Report) reiterated during its first-quarter earnings call last week a commitment to the fast-growing, yet still barely-penetrated cloud market.

During the call, the company said it's been investing "significantly" in the Google Cloud Platform and was spending heavily in data center construction, telling investors it's very serious about targeting the cloud for the enterprise and challenging Amazon (AMZN) and Microsoft Azure (MSFT) in the space. Google, like Amazon and Microsoft, is trying to go for the enterprise through on-demand Platform as a Service, cloud as a service, storage as a service, and server processing as a service.

Capital expenditures for the quarter were $2.3 billion. The company also took a hit to first-quarter earnings through its acquisition of cloud-enabled thermostat and smoke detector startup Nest Labs for more than $3 billion in cash, supporting its play into offering consumer cloud services to the home.

"They're basically willing to make the investment where they have overcapacity, rather than ever being caught not being able to meet surging demand," says Jagdish Rebello, senior director of cloud and compute electronics at IHS. "Google is essentially making a lot of capital investments so that it can never be caught napping as demand spikes." Rebello estimates that only 3% to 5% of the total U.S. cloud market has been penetrated, giving room for tremendous changes that Google is currently well-positioned to react to. "I do think that this will be a growth engine, a strong growth engine for them for the next few years" he added. "I think there's a chance for them to shape the market like Apple (AAPL) did with the touchscreen display in the iPhones."

The cloud is expected to look increasingly attractive to businesses in the coming years, if Google's latest pricing strategy is of any indication. In late March, Google announced at Google Cloud Platform Live that its new cloud strategy is to apply Moore's Law to cloud prices, with an up to 85% reduction in the on-demand rates for Google's big data analytics BigQuery engine.

This law, which got its start in the semiconductor world, thanks to Intel (INTC) co-founder Gordon Moore, essentially says that operating expenses will eventually come down. Rebello is among the industry analysts who are now working on modelling this new strategic plan into his forecasts, and can say that any believer of Moore's Law would assume that if it were applied to the cloud, it would further reduce the barriers to cloud adoption and make it extremely attractive for enterprises to move into the space.

Amazon has been targeting not only the Fortune 500 companies but also start-ups and small and medium enterprises, while Microsoft Azure is essentially going after the bigger enterprises. Google's Nikesh Arora, SVP and chief business officer said during the earnings call that he doesn't think the challenge for the company right now is the need to differentiate, given that the market is still in its early days. He said Google's biggest differentiator is having the most experience in this space.

As the cloud market continues to evolve to include an expansion into big data analytics, Google is also expected to eventually leverage its wealth of experience in search and monetizing search functions in mobile to compete against the data analytics players. "I think Google is in a very good position to figure out matters it wants to take," Rebello said.

-- Written by Andrea Tse in New York

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