I traveled down to Houston today to check out a data center geek’s version of paradise — the inside of the factory where HP builds their rack-mounted servers and high-value blade systems. I shot plenty of photos that show how a bunch of chips and boards gets assembled into a blade that I will put in a later post, but I also got to take a tour of the inside of HP’s containerized data center, known as a POD. “Tour” isn’t really the right word, since it’s hard to move around inside the 40-foot shipping container filled with racks, but it was pretty sweet to see all that processing power in one place.

I’ve embedded a three-minute video below with Wade Vinson, a thermal engineer with HP, and pasted a few photos of the outside of the factory. HP isn’t the only company filling shipping containers full of servers to save power and space; Sun Microsystems and Rackable are doing it as well. And IBM and Dell have indicated that they plan to get into the market as companies seek to place computing in remote locations or build out their data centers rapidly.

When a company builds a web site in the real world, they assemble servers, routers, switches, load balancers and firewalls, wire them up, configure them and go live. But when that application moves into a cloud environment, things change. In a cloud model, the customer isn’t dealing with physical equipment. So who handles all the wiring? And more importantly, how do networking vendors get paid?

Many operational clouds still require their customers to corral their own machines, however virtual. Amazon Web Services is a good example of this. To build an application, the operator still needs to do what they do in the real world — assemble servers, routers and switches to make a data center — only this time, they’re configuring virtual servers instead of real ones.

On the other hand, development clouds like Salesforce.com or Google’s App Engine hide the underlying machines, and handle all the networking equipment — virtual and real — on behalf of their customers.

Either model means a big transition for the makers of traditional networking equipment.

Option 1: Virtual appliances

In a cloud world, the routers, firewalls, and load balancers run inside “virtual appliances” — virtual machines pre-configured to route, block or distribute traffic. Cloud users still have to configure and provision them.

Open-source software dominates the virtual appliance world. For load balancing, Pound is one open-source alternative. For firewalling, there’s IPChains; for routing, Xorp. Some clouds already include these components: Cloud builder 3Tera, for example, offers users a catalog of data center components, including many open-source elements, in its default configurations.

Some vendors stand to gain from a move towards virtual appliances. If you want the kind of service and support you’d get from a vendor, Vyatta does for networking what Red Hat did for servers and MySQL did for databases. And while Checkpoint makes equipment, its software-based firewalls are more easily deployed in a virtual environment than many of its appliance-only competitors. The pendulum swings back to software.

If equipment vendors want to target this market, they need to convert their equipment and licensing models to virtual appliances and differentiate themselves based on software functionality rather than on box color or port density. Companies like rPath and jumpbox both specialize in turning traditional software into virtual appliances.

Option 2: Sell to the cloud operator

But what if the cloud handles the network equipment? This is the case if you’re using a development cloud like Salesforce.com or Google’s App Engine, or if you rely on a turnkey cloud like Joyent or Heroku. The networking equipment vendor sells to the cloud operator.

Which is No Fun At All.

Selling to a utility is notoriously challenging. Carrier sales cycles take months or even years, during which margins get squeezed razor-thin. At the same time, the list of requirements grows dramatically. Because clouds buy tremendous amounts of equipment, they have strong negotiating power. And they often build their own management tools, removing the differentiation a vendor’s software provides.

To make matters worse, clouds may need different equipment. Vendors are innovating, of course: Cisco’s new high-end switching platform, the Nexus 7000, seems well suited to this task. Further, the company has had strong carrier sales since its acquisition of Stratacom in 1996.

Some clouds may even find they have the expertise and economies of scale to build their own equipment. By buying directly from chipset manufacturers and using open-source libraries, they can bypass equipment manufacturers entirely.

One way or another, it won’t happen overnight. While the advent of utility computing is sure to change the networking industry, it will be some time before the trend puts a dent in enterprise IT equipment revenues. Less than 2 percent of CIOs surveyed by Goldman Sachs considered cloud computing a priority.

But someday soon, that load balancer you deploy may be a virtual one. That means two big changes for equipment vendors. One, selling licenses instead of boxes; and two, repositioning their sales forces to sell to telcos and utilities.

It’s been awhile since I’ve provided an update on our upcoming conference, Structure 08, which will be held at San Francisco’s Mission Bay Center on June 25. We’ve been busily adding speakers and further finessing the agenda to address some of today’s biggest technology themes — such as cloud computing — and their impact on the web infrastructure.

Today I am very excited to announce that Jim Crowe, chairman and CEO of Level 3 Communications, will deliver a keynote speech at the conference. He joins our two other stellar keynote speakers: Werner Vogels, CTO of Amazon.com, and Sun Microsystems’ CTO Greg Papadopoulos.

Taken together, the three of them will present a holistic view of the web infrastructure, its challenges and, most importantly, its opportunities. Crowe can offer a view of the web from a bandwidth perspective, Papadopoulos can address the challenges from a hardware perspective, while Vogels can provide the context as to why cloud computing is the obvious way forward for the tech industry. We will be announcing more speakers and a full schedule for Structure 08 over the next week or so. In the meantime, here’s how you can sign up.