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Utility Computing: Perceptions and Reality

As enterprises try to cut costs and improve efficiency, utility computing is becoming an attractive data center model for procuring transaction-based IT services. But one investment bank says hype and reality need to be reconciled.

While the market for utility computing is still in its initial stages, several major computer hardware manufacturers are devoting sizeable resources to develop server automation and allocation products, including IBM Corp. , Hewlett-Packard and Sun Microsystems .

"Utility Computing is still at its 'evangelical stage' and many vendors are largely 'priming the pump.' We sense the true economic advantages of Utility Computing today remains more of a marketing rather than an economic reality," Deutsche Bank wrote in a research note issued on Friday.

"Utility Computing may allow large-tier vendors to address a new segment they have traditionally been unable to tap -- the small/mid-sized market. Utility Computing should also create a new demand wave for IT consulting services as a precursor to help clients move to this new model," Deutsche Bank said.

But while some of the leading IT companies may have a perceived advantage in the nascent utility computing market, Deutsche Bank singles out Electronic Data Systems and Accenture as two companies likely to benefit from this sub-sector.

"We foresee significant opportunities for EDS, ACN, and other large-tier vendors amongst our coverage universe with strong account control. From our conversations, IBM's marketing leadership, for now at least, is largely based on perception and not any meaningful competitive advantage," Deusche Bank said.

But the bank said the utility computing market is not without its risks.

"We would not buy any of our covered stocks based on this Utility Computing trend alone. Despite some vendors' claims, the timing of this new wave remains unclear - much less if it will become a market reality at all," Deutsche Bank said.

But several of the major computer companies have utility computing initiatives well underway.

HP calls its strategy Adaptive Enterprise and is billing its Utility Data Center (UDC) as a way for companies to consolidate and make decisions regarding the allocation of data center resources through the use of virtualization technology. UDC aims to automate and optimize data center management. Earlier this year, HP said it would resell Opsware software that allows IT managers to manage configuration changes using virtualization technologies in huge data centers.

Sun has put considerable resources into its N1 strategy, which aims to create a seamless system that connects servers, networks and storage system using virtualization technologies. Sun's acquisition of Terraspring Inc. improved its virtualization and automation offerings.

IBM on-demand strategy is a key plank of the company's emphasis on customized services. IBM recently announced its Infrastructure Management Assessment Services and its acquisition of Think Dynamics is part of building its on-demand, automation and utility computing brands. IBM is also marketing its Tivoli system management and virtualization tools providing IT managers with customized services levels for clients.

IBM detailed its Infrastructure Management Assessment Services, which will include what the company calls an "on-demand workshop." After some meetings, IBM provides an "autonomic assessment," which using its Tivoli management examines the customer's systems management structure and devises strategies for improving the company's management tools. The final piece of the service is called "Universal Management Infrastructure" enabling the firm to implement the integrated solution.

IBM says its Infrastructure Management Assessment Services is a means for managing a data center, through a comprehensive system managing both its hardware and software.

Deutsche Bank said "at its core, Utility Computing aims to make IT purely transactional. The concept - pay for the drink rather than the bottle - is certainly alluring and is not that different from the old mainframe 'time-sharing' model. It is starting to 'ring' with some customers but is also creating market confusion."

Deutsche Bank advises that "investors should realize that Utility Computing is at an early maket development stage and must separate the hype from the reality."