The Destruction of the American Server Sector

NEW YORK ( TheStreet) -- The biggest news I saw Wednesday did not come from Apple ( AAPL).

It came from Intel ( INTC), a story in Wired that confirmed something I have long suspected.

The cloud is killing America's server business.

The cloud is a game that Apple has been late to join. It built a huge data center in North Carolina for what it calls iCloud, and it's building a second center in Reno. Reportedly they're powered by the same software running Microsoft's ( MSFT) Azure cloud.

Because of the cloud, the biggest iPod in the Apple lineup has gone from a 160 GB iPod classic, which I bought over a year ago, to a 64 GB iPod Touch that's more of a mini-iPad than a music player. Storage has moved decisively upstream, into PCs and the cloud.

But the cloud is not just a data center. It's not just a place to store your stuff.

The public cloud is evolving into networks of clouds, where huge sites are mirrored in many, many places, and there is plenty of capacity for hosting more. The public cloud has two strong leaders, Amazon.com ( AMZN) and Google ( GOOG).

Google had first-mover advantage here. It pioneered the use of general-purpose computers, rather than proprietary servers, in cloud data centers. Amazon was the first to fully commercialize this new capacity with its Elastic Cloud 2, or EC2, offering. EC2 lets any online idea scale quickly at low cost and lets big companies put up and take down capacity on a whim.

EC2 created Facebook ( FB), which has since grown into building its own cloud network, running open source cloud software. Many other consumer web companies, such as Zynga ( ZNGA), now see a need for their own clouds and cloud networks.

But what about the hardware? Intel still dominates the server chip business, but it has seen a dramatic shift in demand. Back in 2008 the server market was dominated by Hewlett-Packard ( HPQ), Dell ( DELL) and IBM ( IBM). Now there are eight major players. Google is one of them.

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