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Having followed the optical network business for over a decade, one thing I have learned is that the boom and bust cycles of the business often mask patterns that have long-term implications. The overbuilding of U.S. networks in the 1990s foretold a bust in the telecom industry. The buying up of bankrupt carriers’ assets indicated the rise of new players including Google, which has built a fearsome infrastructure. These days, all the excitement in the optical business is around new undersea cables being laid (or planned), bridging previously unconnected parts of the world. These cables are, in fact, the early warning signs of a pending economic boom.

Let me explain. In the 1990s, we saw a grotesque number of cables laid under the Atlantic and Pacific, connecting the United States with Japan, parts of Asia Pacific and Europe.

Those three regions went through an unprecedented boom, much of it inspired by technological changes that had millions turning to the Internet. The boom, also inspired by deregulation of the telecom infrastructures in those countries, led to further spending on communications such as wireless phone calls and high-speed Internet. Unfortunately, the demand (captured quite well by bandwidth provider Global Crossing in early days) led to overbuilding, oversupply and eventually a bust.

Growing Fibers In Asia

A similar scenario is now playing out in the Trans-Pacific region where cables are being built rapidly, and the bandwidth capacity on pre-existing cables is being doubled. Many more cables under construction are connecting with India and China, both of which are going through their own economic booms. According to the World Bank, China is the world’s second largest economy, and India claims the fourth spot. These countries have become economic hubs — not only buying but also selling to the outside world. And a key ingredient of trade is the ability to communicate, which in turn requires the large amount of capacity that can only come with undersea fiber cables.

The latest such effort is SEACOM, a $650 million, 15,000-kilometer cable connecting East Africa with Asia and Europe that is expected to be completed in June 2009 and provide 1.28 Terabits per second of network capacity. This is just tip of the iceberg.

According to TeleGeography, a research firm that tracks the global broadband business, there are about 12 cables either in planning stages or under construction that will connect Africa to the rest of the planet. Those connections will have a theoretical capacity of over 13 Terabits per second, and construction is estimated to cost more than $3 billion.

In Africa, Mobiles Drive Bandwidth Demand

Why so much connectivity? After all, PC penetration is abysmally low in Africa. The answer is cell phones. At the beginning of 2008, there were a quarter of a billion mobile subscribers on the continent, according to International Telecommunications Union, and Portio Research estimates the number will increase to 378 million by 2011. Local companies are furiously building out networks, and by all indications, the overall market penetration is going to increase from the 28 percent mark reported at the start of this year. Cell phones need networks to transfer calls between countries, so there is a need for networks to circle the continent — or at least countries like Kenya, Nigeria and South Africa, which have the most critical demand.

In the recent past, India went through a similar cycle, where a spurt in mobile sales acted as a catalyst for the overall economy. Phone calls provide the vital connections for trade to flourish in areas hitherto unconnected. Something similar is happening in Africa, where mobile banking has emerged as a facilitator of cross-border trade.

You can see a similar scenario set to play out in other parts of the world. There are about five cables on the drawing board or under construction that would connect Cambodia, Bangladesh, Vietnam and some of the smaller countries in Asia. All these countries are going through an economic upsurge and are becoming part of the global economic system.

This leads me to my conclusion: Building new cables is the equivalent of adding new roads, new shipping lanes or flights. The undersea fibers of today are what sea trading routes were in the past — an indicator of future economic activity and the subsequent boom.

This article first appeared on BusinessWeek.com

Online storage companies pop up more frequently than mushrooms after a downpour in Southern France. And like the wild-growing fungus, not all of them are easily digested. Case in point: AOL’s Xdrive, which despite corporate backing recently joined the likes of Omnidrive and MediaMax on the proverbial technology garbage heap.

That doesn’t dissuade entrepreneurs and their backers from joining the fray. At last check, we counted more than two dozen startups trying to carve a piece of the online storage pie in the hopes that they’ll get enough traction to one day make money. Along with clever and colorful names, each one claims a subtle twist — syncing, access from mobile, or whatever — on what is essentially a commodity offering: storage.

Sure there are some services that are clearly superior (SugarSync, for example) or have nifty features like automatic syncing (Dropbox), but when viewed as a group, it’s hard to tell which one is going to emerge as the winner over the long term. When you think about it, the online storage business is no different that selling denim jeans that have different shades of blue, rivets, fits and flares.

Storage startups similarly distinguish themselves with storage capacity, or features such as the ability to sync automatically or share large files. These days many of them have started to use Amazon’s S3’s wholesale storage to power their services, which makes the differences in some case largely cosmetic.

I am constantly asking these startups how, exactly, they plan to make money. I typically get one of two standard answers: by selling ads or charging for additional storage. Nice ideas in theory, but clearly out of sync with reality.

In order to make a decent amount money off advertising, these startups need to generate hundreds of millions of page views, unlikely unless they allow people to share large files, which can often lead to a legal mess.

The presence of a large number of players with no clear leaders means there is little hope of making money in the online storage business from advertising. It also explains why Xdrive, which is owned by AOL, a division of Time Warner, is getting out of the business.

How about getting consumers to pay for storage? Even that seems to be an uphill task. I have spoken to a few founders of online storage companies and they’ve admitted that conversion rates to paying customers are abysmally low. Why? It is the same pesky problem of too many players, which allows you and I to spread our files all over the Internet without spending a dime.

One of the services that seems to be doing quite well is Mozy, which was acquired by EMC, mostly because it had started to sell to larger companies. Mark Lewis, an EMC executive, was quoted as saying that Mozy may be popular with consumers, but it is a perfect solution for large companies as well. The company hasn’t revealed how many people are using the service, but Mozy.com does get about 100,000 people checking it out every month, according to Compete.com, a web site traffic tracker.

So what are the options for surviving in the online storage business? Actually there are a few tricks that can help startups both stand out and thrive. SmugMug, for instance, has used Amazon’s S3 as its back end to offer a for-pay niche service optimized for professionals like photographers and building features such as watermarking. Of course, these opportunities are few, and folks like SmugMug have already staked out their position.

The other option is to shift focus away from storage to “collaboration.” Using online storage as an underpinning to share documents, files and folders with people in your network (whether consumer or corporate) is the right approach.

Microsoft is doing quite well with its SharePoint service, which is essentially storage layered with other services. Chris Caposella, corporate VP in charge of the Redmond giant’s business division, described SharePoint as “the office suite for the next generation.” This service is so popular that it’s expected to bring in about $1 billion this year for Microsoft. What’s working well for Microsoft, and to some extent, Google, is that they are treating storage for what it is — a cheap throwaway service — and layering it with more valuable ones.

One company that seems to have gotten the “collaboration memo” is Box.net, a Palo Alto, Calif.-based startup that has developed an open-collaboration strategy. Box.net is using its API to interface with other web services such as Autodesk, EchoSign, eFax, Myxer, Picnik, Scribd, Zazzle, Thinkfree and Zoho, and in the process becoming a major collaboration platform that rivals SharePoint. Box.net calls its strategy OpenBox.

This is an offering that Box.net CEO Aaron Levie can sell to businesses –- big and small — as a service for a monthly fee. And perhaps that is one way he can avoid the fate of some of his more prosaic rivals.

This was originally published on BusinessWeek.com.

In 10 years, which company will own the cloud computing space? That question has been the subject of long and contentious funding debates over the past year, especially here on Sand Hill Road. And while I know that predicting the future is an inaccurate science, I think that when it comes to evaluating this nascent industry, the VC community has been focusing on the wrong criteria.

Today, cloud computing offerings are application-specific frameworks that are run by companies both large and small. Google’s App Engine is a cloud for running Python applications; EngineYard is a cloud for Ruby-on-Rails; Amazon’s EC2 and S3 provide generic compute and storage clouds, and so forth. While each of these companies addresses a vertical market need, I believe that by 2018, clouds will instead be evaluated based on three generic criteria: transactions, user experience and presence. And as with any active market, it’s a safe bet that there will be plenty of companies that best showcase each of them. One of the emerging trends in cloud computing is providing infrastructure that allows businesses to perform transactions. Two companies that immediately come to mind are eBay and Amazon; both have significant infrastructure expertise and business divisions devoted to processing their customers’ transactions. Amazon in particular just launched Checkout, which facilitates highly scalable transaction services. Imagine if over the next 10 years these companies find a way to bring their scale and transaction expertise to a cloud offering across multiple industries and market segments.

What will become increasingly critical is providing cloud consumers with a spectacular user experience, something nobody does better than Apple. While I realize the company is not strictly focused on cloud computing today, imagine a scenario in which it leverages the success and elegance of iTunes — essentially a cloud for selling digital media — to other markets. I can foresee a cloud computing environment where Apple allows users to build applications using their user interface templates and designs; every application developer that strives to make their application “as sexy as iTunes” could leverage this infrastructure. A current example of Apple’s approach can be found in its new MobileMe cloud, which emphasizes ease-of-use and user experience for keeping email, calendar and contacts synchronized. Elsewhere, Google Gears and Microsoft Live Mesh are also attempting to be environments in which users develop cloud applications, but they don’t seem to have the same focus on consistency of user experience.

Speaking of Microsoft, when it comes to presence in the computing space, they have an enviable position. With their software presence on the PC, mobile phone, game console, media center and even autos, they’re set up to be everywhere for at least the next decade. And the Redmond giant has recently changed its PR to emphasize software and services, which leads me to think that they’re moving to offer a wealth of cloud-based services.

The key will be leveraging their almost ubiquitous presence across nearly every aspect of the computing space to convert their hordes of desktop and IT application developers to work on their cloud in order to come up with future services for the same markets. If Microsoft can execute on this strategy, use their presence and motivate their developers, they will be a significant player in the cloud computing market in 2018.

It seems clear that the dominant cloud computing company in 2018 will be able to process transactions on the scale of Amazon and eBay, have the eye-popping user experience of Apple and the presence of Microsoft. Which cloud company do you think it will be?

Fellow GigaOM writer Alistair Croll contributed heavily to this post.

Last week, at the Fortune Brainstorm: Tech Conference in Half Moon Bay, Calif., I caught up with Michael Dell, founder and chief executive officer of Dell Inc., the Round Rock, Texas-based computer hardware maker. He’s been trying to get Dell’s mojo back for over a year now, and in the past three months, things have started to come together, with sales, profits and the company’s stock price beginning to move in the right direction.

We had a wide-ranging conversation, one that covered everything from cloud computing to the likelihood of Dell entering the smartphone business to the advantages of being a founder. Below are edited excerpts from my chat with the eighth richest man in the U.S., who is as humble today as the day he started selling computers from his college dorm room.

On cloud computing

Om Malik: Will Dell ever start offering its own cloud services?

Michael Dell: Today, we sell to the guys who make clouds. We actually already have some services that we provide; you can think of them as software-as-a-service. For example, for managing your infrastructure, we purchased a number of companies recently like Everdream that are all services provided online. We’ve got a huge business in managing the computing infrastructure for large companies.

Om: What do you do as a company to become a leader in (cloud) client computers?

Dell: For the last eight years, here in the U.S., we’ve sold more computers than any company in the world. In fact, last quarter our lead kind of widened relative to the No. 2 company. Mobile Internet devices and smartphones are all part of our mobile computer business. Our focus is on the bull’s-eye of the volume, which today is notebooks, computers and laptops.

The interesting question is these “Internet-in-the-pocket” kind of things. Do those replace the notebook, or are they a compliment to the notebook? That is the kind of threshold question one would think about as you explore this.

Om: It is actually a complimentary device. But I think the bigger opportunity is in buying those devices because they can be replaced every six months.

Dell: No question, this is a large and significant opportunity and it’s one — I think you will see Dell move in that direction. But I think it will be sequenced in the right order relative to all the opportunities we have.

Om: What do you think is the biggest opportunity for Dell?

Dell: We have identified five big opportunities. When I say big, I’m talking about $5-$10 billion dollars each in terms of scale opportunities. They are the consumer business, mobile computers, emerging countries, enterprise, and small/medium business. We [have] reorganized the company around these key priorities.

On smartphones

Om: Any plans for mobile phones or smartphones?

Dell: We are certainly looking at the whole smartphone category, but I wouldn’t expect anything anytime soon.

Om: With the emergence of Google’s Android, and with Symbian OS and Microsoft Mobile already on the market, do you think that makes it easier for Dell to get into the phone business?

Dell: What you’ve got [are] industry-standard platforms upon which applications are being built and ecosystems are being created, and that kind of building-block architecture gives us all sorts of opportunities.

Om: You can be a big game-changer in this market, right? You can decide to work with Android or Symbian. Is there a desire on your part to work with one over the other?

Dell: We’re not ready to publicly disclose our plans there…we’re kind of working on that.

On being a founder

Om: From your perspective as a founder, what makes a founder/CEO different than a professional CEO?

Dell: The founder has special permission to make changes at a company. There have been two or three times within the history of the company where we’ve made some pretty dramatic changes; the last year and a half has been a good example of that. When I told our company that the direct model has been a great revolution for the industry but it’s not a religion, that was actually a pretty big shock to a lot of our people. Some of them thought it was a religion.

I think as a founder you get special permission to call into question things from the past, and it is up to you to figure out how to do that.

Om: So it’s almost like a political job in that sense.

Dell: I think there’s a lot of equity and trust that gets built up in the company over time. And when we’ve laid out the priorities in the organization — if we’ve done a good job and people see the results and they can see how their efforts apply to their success, and how they can realize their own dreams at the company — then they kind of say, “These guys know what they’re doing.”

On the future

Om: My impression has always been that your biggest competitive advantage was your supply chain; you fine-tuned it to such a level that others couldn’t compete. That has actually evolved over a period of time because others have started to think like the “Dell” way. What is the next competitive advantage going forward?

Dell: I think it’s true that we have had and have a supply-chain advantage. If you look at, for example, return on equity, you’ll see that our return on equity or vested capital [has been] massively higher than our competitors and still is today.

That advantage is very much intact in terms of the capital efficiency of the business. But I think that is really only part of the story. What informs that advantage is the connection we have with customers and the information that customers convey to us in the process. By knowing exactly what customers want and being able to build that and provide products and services tailored to customers’ needs and being able to personalize products — that creates significant advantage and significant growth possibilities for us.

Photo Courtesy of Dell Inc.

In the life of every company, there comes a time when it is faced with the choice of how to extend its reach: Either build a new product or service, or acquire the one that’s already established itself as the best in its class. Larger companies face that question every day, but it is rare for a nano company like ours to have to make such a decision.

I am pleased to announce that Giga Omni Media, the company behind GigaOM, has acquired jkOnTheRun, a blog started by James Kendrick and Kevin Tofel that focuses on the wonderful world of mobile gadgets, including mobile phones and cloud client computers. James and Kevin will join GigaOM, but will continue to work from their respective homes of Houston and Telford, Pa., and jkOnTheRun will become the sixth blog in the GigaOM Network. (James & Kevin write about the deal on jkOnTheRun. Also, coverage on The Houston Chronicle & Techcrunch.)

“Acquiring,” while technically the right word, is a relatively soulless one. I prefer to think of this deal more philosophically. As I see it, we have proudly added two new members to our growing family.

Why jkOnTheRun?

jkOnTheRun is one of the rare blogs that covers the world of mobile gadgets with razor-sharp wit and insight. More importantly, it has a genuinely consumer-centric point of view. I first got to know the blog as a reader and have long considered it good enough to rank among my 10 favorites. (WebWorkerDaily editor Judi Sohn is also a fan.)

Strategically, it’s a publication that rounds out our existing areas of coverage. For instance, GigaOM tracks the world of web infrastructure pretty closely, but very rarely do we write about cloud client machines. And with the exception of the iPhone and some occasional mobile reviews, we don’t provide much gadget coverage, either. I think as we start to cover the world of cloud computing more closely we will no longer be able to afford to ignore the client side of the equation.

What happens to jkOnTheRun?

Absolutely nothing! Sure there are going to be some cosmetic changes, including cleaning up the web site to make room for sponsors and advertisers, but if it ain’t broke, why fix it?

James and Kevin will continue to write their posts, record their podcasts and shoot their videos. The jkOnTheRun feed will be integrated into that of our network and will be syndicated along with our other blogs. We hope some of our readers become part of their community, and hopefully some of jkOnTheRun’s readers will find something in our network that they like as well.

In summary

Getting back to my introduction: We were faced with the choice of either building out a blog that helped us track the mobile revolution more carefully (but with a consumer perspective) or buying one. It would have taken us a long time to build one — buying jkOnTheRun was a far better option.

I think in many ways that is the blueprint of our strategy going forward: When we find blogs that allow us to dig deeper, to complement and extend our areas of coverage, we will acquire them. If we can’t find ones we like, we will build them. But all that is in the future. Today, please join me in welcoming James and Kevin!

It could be my advancing years – I seriously doubt that – but every morning I dread turning on my MacBook Pro, fearful of the data deluge that it will bring and the day-long struggle to find the information I need to get things done that will ensue. And I’m not the only one caught in this quicksand-like avalanche of digital data.

According to market research firm comScore, in May the total number of Internet searches conducted in the U.S. alone was about 10.7 billion — up nearly 20 percent from 9.1 billion searches in May 2007. Those numbers make clear that we’re all searching for more information. What they don’t make clear is that often we don’t find what we’re looking for, and so end up trying again and again.

The problem is that there’s too much data coming online too quickly, and the traditional method of search that involves first finding and then consuming the information is not going to work for much longer. There just won’t be enough time for us to do that and still have a life. It’s a problem, and therefore solving it is an opportunity — a very big opportunity.

Earlier this week I was going through the digital detritus that has accumulated on my computer when I stumbled upon an old slide presentation made by Google back when they were still tiny. One slide estimated that by 2002, there would be about 500 million searches a day and between 3 billion and 8 billion web pages.  Now those numbers seem so last century, for every day the amount of information online continues to grow at an exponential rate. It’s nearly impossible to calculate the exact number of web pages that are out there, but a good yardstick would be data from Netcraft, which tracks the number of servers on the Internet and says that the number of active domains almost quadrupled from 2002 to 2007. The total number of web sites at the end of April stood at over 162 million.

Many of these new sites are courtesy of Web 2.0 technologies that have allowed for the easy creation of digital data. Blogs, social networks, RSS feeds, Flickr feeds, Twitter messages, video clips…the data just keeps growing and growing, much like the proverbial Energizer bunny. And the problem of data overload is going to get even bigger as devices such as the 3G iPhone, with their fast wireless connections, make the on-the-go creation and sending of videos, messages and photos to our friends even easier.

If someone can become the Dolby of the web — remove the noise and give us clear sound — then they are going to make a lot of money. And when I say sound, I mean data that is truly useful. But that would just be the start.

Pip Coburn, who runs his own investment firm in New York, recently pointed out that “It’s not data that’s important, but what you do with it.” A good example of that would be a tiny startup called Summize, which is reportedly being acquired by Twitter.

Summize has come up with a clever way of peering through Twitter’s vast data stream and finding out what’s hot, where and how. The results are essentially keywords — topic-, person- or location-based — and thus can be used to show contextual advertising next to the pages that show these results. In other words, Summize has developed an ability to monetize conversations without being intrusive.

The possibilities of what a similar service could do with this data are endless. Imagine a service that would scroll through all the Flickr photos, Twitter messages and marry them to data on the Internet, such as nearby mass transit stations, Starbucks, movie theaters and grocery stories.

All this information would show up on your phone, but you would only see the options in, say, a 100-meter radius that could be increased by zooming out. It would be the ultimate mash-up of various web data sources offered to you as an application, and such applications would make it possible to find, consume and share information — without even trying. 

Almost like serendipity! How’s that for a business model?

This post was originally published on BusinessWeek.com.

About six months ago, I heard that Yahoo was contemplating offering its entire search platform as a web service, much like Amazon’s S3 storage and EC2 computing services. Since the rumor was short on details and Yahoo was already in the midst of a gut-wrenching upheaval, I didn’t put much stock in it. Apparently I should have, for Yahoo today announced the beta version of BOSS (Build Your Own Search Service), which essentially turns its core search and other related technologies into a free web service that can be used by anyone who wants to build their own search engine.

This isn’t simply access to Yahoo’s search results; Google did that ages ago, though I wonder if anyone actually uses it. Rather BOSS will allow anyone to rank, arrange and display search results that befit their own algorithm, without as much as acknowledging that the results are coming from Yahoo. 

Yahoo News Search, Image Search and Yahoo Spell Checker services will all be offered as part of this effort. Combine this with Yahoo’s recently introduced SearchMonkey tool, and you could build a search engine that is entirely your own.

Prabhakar Raghavan, chief strategist for Yahoo Search, said it typically costs around $300 million to build a search engine and its related infrastructure, which is why there are so few players. He has a point: Powerset recently sold out to Microsoft for precisely those reasons.

Raghavan hopes that BOSS could help foster a lot of experimentation around search, and more importantly, around the search experience, because startups will no longer have to spend millions on infrastructure. “The opening up of our search is a philosophical shift, and we are saying that if you can be better than us, so be it,” said Raghavan. “There is no shortage of search ideas, though the barriers were only a few hundred million dollars. You have to be willing to have your lunch eaten in order to disrupt.”

The BOSS service is being offered for free, though as part of the deal users will have to use Yahoo’s Search Advertising. Yahoo believes that by boosting query volumes, it can create more volume for its search advertising and thus begin to grow against its nemeses: Google & Microsoft.

It’s a very bold move by the hobbled online giant, as it puts its own search business at risk. “We are trying to disrupt the market by allowing people to come and build on our platform,” Raghavan admitted. Two startups, Hakia and Me.dium, have already signed on for the service.

But I think it’s a risk worth taking, for it will shake up the search status quo and offer a way in for the little guys and all their creativity. Far more importantly, however, it helps people to think of Internet search beyond the tried and tired paradigm of proactively “finding” information.

Unlimited queries, the ability to mix with other content including news, and research from universities and other such repositories could really change the game. By allowing folks to use its engines in tandem with their proprietary data (such as a proprietary social graph), Yahoo will allow them to build a different kind of user experience. “We don’t need to see proprietary data but work with them,” Raghavan said.

This isn’t a slam dunk, however. Yahoo still has some serious challenges ahead of it. The company’s hope is to show big gains in search queries and search-query related advertising revenues. Just like I hope to be the starting pitcher for the Yankees.

Yahoo executives didn’t answer my repeated questions about the potential impact on their business. Notably, they are asking startups to sign up for their search monetization system — the very same system that is going to use Google to drum up ads. That isn’t a very confidence-inspiring move. And if this monetization tool was so great, Yahoo wouldn’t be in the kind of trouble it’s in. If you’re a startup, do you want to hitch your wagon to a wanna-be ad system?

My reservations aside, this is a big, gutsy move by Yahoo to emerge from the stupor that has enveloped the company and the search industry at large. I’m looking forward to seeing the results of this experiment.

Yahoo’s Blog has more details on the new offering.

When visiting Israel in the middle of summer, it’s generally not a good idea to go for a walk in the afternoon, even if it is along the sea. The heat and humidity sap your energy, making you feel as if you spent nearly three hours in the gym. But that wasn’t enough to stop me from writing a post about Microsoft buying Powerset for what is rumored to be around $100 million.

I’ve been unable to stop wondering why founder Barney Pell decided to take the money and run — after all, he used to turn blue in the face telling people how superior Powerset’s approach to search was. If it was so superior, Mike Masnick of Techdirt put it best when he wrote that “[T]he exit certainly falls well short of the hype around Powerset. If Powerset was actually seeing any traction at all it never would have agreed to sell at that price.”

To some extent, Mike is right, but I would add another reason: infrastructure, specifically how expensive it is to build. At our Hadoop meet-up earlier this year, Chad Walters, director of engineering at Powerset, noted that their search “requires 100 times more processing than simple keyword searching and indexing (about one second per sentence is required for processing).”

Powerset used some pretty nifty technologies to build out their system, but in order to really scale, they would have needed more money — a lot of it.

And Powerset would have had to scale; there’s no other way to compete with search’s 800-pound gorilla, Google. That’s why Microsoft is building a gigantic data center in the Chicago area focused almost entirely on search. (Which it can now use to help roll out Powerset’s search technology to a larger audience.)

This is an abject lesson for every startup looking to get into the business of search: No matter how good your algorithms are, you still have to deal with the cost of queries, which need to be low enough to be offset by some kind of advertising in order to make a profit. (The conspiracy theorist in me says that if your results are really good you won’t be able to generate enough inventory to serve up ads that bring in the dollars, but maybe I’m just too cynical.)

One of our readers believes that it is possible to build a search engine that surpasses Google’s. Nevertheless, as I’ve noted in the past, “[P]rocess-optimized infrastructure ensures that Google???s cost of executing a query keep going down” — and that allows the company to wring more dollars from the system.

Given all that, Powerset has done a good job of wringing a hundred million from Microsoft. Not that there’s anything wrong with that.

Bonus Link: Don Dodge of Microsoft explains the logic behind the deal.