Can This OpenStack Be Saved?

NEW YORK ( TheStreet) -- The cloud market has not evolved the way it was supposed to.

While public clouds like Amazon.com's ( AMZN) AWS were expected to grab a lot of business from start-ups and corporate marketing departments, it was assumed that mainstream information-technology people would be afraid to embrace it.

The idea was that these folks would build their own private clouds, and then look to connect these clouds to compatible public clouds, creating hybrid clouds.

OpenStack, an open-source cloud infrastructure, was developed around this idea. Rackspace ( RAX), the original sponsor, is a Web host that now uses the technology in its public cloud. The bullish case for its stock is that it would gain traction in the public cloud market as companies built private clouds and attached them, creating compatible hybrids.

Many big companies were attracted to the OpenStack idea, sponsoring the software, nurturing it, and eventually organizing an OpenStack Foundation around it. Red Hat ( RHT), a Linux vendor with lots of big customers, committed to OpenStack. So did Hewlett-Packard ( HPQ) . More important, so did IBM ( IBM).

So what happened? Amazon kept cutting prices, and kept gaining customers. Big corporations found they needed "big data," and insights from analyzing it, more than they realized.

Google ( GOOG) saw this train leaving the station and matched Amazon's prices. Microsoft ( MSFT), whose Azure cloud platform was first sold as a more sophisticated, Windows-centric public cloud, chose to offer base infrastructure and matched Amazon's prices as well.

The public cloud price war has hammered Rackspace's results, and stock price. It seems to have discouraged other OpenStack supporters, like Dell ( DELL), which said this week it would resell partners' cloud services rather than create its own OpenStack cloud.

You might say a cloud hangs over the OpenStack cloud. Without a price-competitive entrant in the hot part of the market - public cloud - it's hard to see how it will ever gain traction as a replacement for existing computing infrastructures.

I suggested this represented a problem to IBM on another channel.

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