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), 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.

So while OpenStack is open source, meaning it's technically free to use, big vendors came to Atlanta to put their own stamp on the software. HP delivered its own "distribution" of the software, called Helion, while IBM toasted its proprietary cloud add-on, Watson.

What the big vendors hope is that big customers will depend on them for moving to cloud technology. Verizon (VZ), AT&T (T) and CenturyLink (CTL), for instance, all want to move from expensive switches to OpenStack clouds for providing services, becoming Internet Service Providers rather than phone companies.

But that's a trick you can only do once.

While the elephants are struggling to get into the OpenStack lifeboat, smaller vendors are prospering.

RedHat (RHT) had $1.5 billion in revenues last year from Linux, OpenStack, and other open source software. They see big profits coming to them from the shrinking waterhole, from companies building clouds inside their own firewalls, while providing integration with the cheaper public cloud systems.

Perhaps no one represents OpenStack's contradictions better than Canonical, a privately-held British, Linux vendor with about 600 employees, and its CEO, Mark Shuttleworth.

At his Tuesday keynote Shuttleworth, a South Africa native who rode the Space Shuttle as a paying passenger in 2002, gleefully created cloud stacks using a variety of parts, Canonical software and resources he thinks he can make money from. He then described pricing that could, even if the whole market came his way, keep a company like HP afloat for only a few weeks.

He was preceded to the stage by a smaller company called SolidFire, showing a reference design partners like Dell can use to turn cloud into something you buy as a box, not just something you rent or build from parts.

All of this technical excitement gave a bubbly feeling to the event, like the Internet shows of 20 years ago, when many of these attendees were in grade school.

But unless something like the Internet of Things really explodes demand for cloud services, the creative destruction of cloud may be heavy on the destruction.

At the time of publication the author had positions in GOOG and AMZN

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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