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Why the OpenStack Cloud Bubble Will Soon Burst

NEW YORK (TheStreet) -- The OpenStack Summit, which stopped in Atlanta this week, is a lifeboat with too many passengers aboard it.

OpenStack is an open-source cloud infrastructure that began as Project Nebula at NASA. The government decided the software would improve faster as open source, and Rackspace (RAX) was the first sponsor. Now it's run by foundation headed by Alan Clark of SUSE Linux, a unit of The Attachmate Group.

According to Clark, the heart of the week-long meeting is the Design Summit, in which a "blueprint of functions" will be created for the next version of the software and a road map hashed out detailing who will do what.

To an outsider it's a small world of tee-shirted programmers wandering among technical seminars, collecting toys from an enterprise technology industry that sees cloud as the next iteration of the Internet market.

But price sells cloud. Amazon (AMZN - Get Report), Google (GOOG), and Microsoft (MSFT) have been putting billions into their cloud capacity for years. They are engaged in a bitter price war that is drawing most of the big scaled sites of our time, like Netflix (NFLX), into their orbit.

OpenStack can compete with the public clouds in many ways but not on price. Open source, in this case, is the high-cost choice.

This leaves big OpenStack vendors facing a shrinking waterhole. They can save corporations and governments money and private OpenStack clouds can replace traditional server clusters, but for companies like Hewlett Packard (HPQ) and IBM (IBM), the money being saved is coming out of their pockets because it used to be spent on their gear.

Many of the elephants' big breakthroughs are coming from relative mice. At a small table on the trade show floor Adi Paz, executive vice president of Gigaspaces, an Israeli company, described how his software can Cloudify an enterprise application.

When IBM says that you can run its older software, like Cognos or DB2, in a private cloud Gigaspaces software is making that happen, Paz said. IBM keeps the software license, but hardware sales decline.

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