It appears that retailer Woolworths (ASX: WOW) is whole-heartedly embracing "cloud computing." According to a report by IT News the Chief Information Officer at Woolworths Mr Damon Rees expects the retailer will close its Sydney data centre within five years.
The news comes as a blow for Woolworths' shareholders, who paid for the data centre to be custom-built just a few years ago; however according to Mr Rees, today only around 20% of the centre is utilised. It highlights an issue businesses regularly face when making investment decisions surrounding information technology — the speed of change can render IT spend defunct within just a few short years.
In Woolworths' case, the company has migrated 26,000 staff away from Microsoft software and over to Google and the cloud; this move alone has saved the retailer 50 servers. Of course part of the appeal of the cloud is the potential for it to save businesses money, so while in the near-term the Sydney data centre may look like an expensive decision, in the long-run Woolworths will no doubt save money by moving more of its data and systems onto the cloud and hosted arrangements.
As Woolworths' experience shows, more and more companies will in coming years replace their legacy systems with cloud related-systems. While the scale of the shift will encourage many competitors to enter the Australian market – the giant online retailer Amazon is one of many foreign competitors – early mover, trusted domestic players also stand to be big beneficiaries. These players include Telstra (ASX: TLS), Macquarie Telecom (ASX: MAQ) and Vocus Communications (ASX: VOC), who have all established cloud-enabled data centres and provide managed hosting services to clients such as Woolworths.
Foolish takeaway
Given the potential for competition to quickly erode profit margins and turn many cloud services into commoditised goods, it is likely that early movers, trusted providers and the managed-hosting service providers are best placed to earn the more appealing profit margins within the sector.
