Let's assume for a moment, you're called Jim and you're the IT manager at a fictional organization. Your boss walks in, tells you the development team is ready to deploy their ultra scalable video sharing web application. It's very hard to determine how well the market accepts the new web app, we could be the next Youtube, or we could have a much harder start. We estimate to need anywhere between 10 and 100 servers the first couple of weeks, and anywhere between 1 and 50 terabytes of storage depending on market demand. The boss opens the door ready to leave, then he turns around and tells you, can you please have that ready by the end of this week! Talk about poor management in this hypothetical company, in reality things are not that bad, well and in many cases not much better either. So, if you were Jim, you would now probably be thinking of ways to end your life, or at least you'd be writing a farewell email! With the advent of cloud computing however, you have other options. You can snap your fingers, and have a hundred servers created, snap them again and have 50TB of storage appear right next to them, ready to serve you. If you think that's more "magical" than the iPad launch, you would be right although I'm sure Steve Jobs would disagree. That magic is what hypes many IT people about clouds! Well technically, instead of snapping your fingers, you'd perform an API call to a cloud provider. That means you either run a command or click a button in some management tool and those resources spring to life! Can you already feel how enabling this cloud thing is!
Cloud is called "cloud" because you don't really know what's inside it or how it is built. A cloud icon was and is the standard representation of the "Internet" or a remote network that you don't really care about, or don't control. It is in essence a black box to you, with traffic going in and coming out the other end. You should not know or care how it is built, you're not involved in its daily operation. It provides you "services" that you use. In Jim's case, those services were large numbers of servers, storage and of course networking (you still need a way to access those remote resources anyway!). Jim requested his 50TB of storage and got them, he does not really know what is the physical backing store to this storage service. Are those terabytes of storage (which are holding his company's most precious data) living on a fiber connected high-end SAN storage, low-end SAN or is it a NAS filer. How are the servers accessing the storage network, is it high performance infiniband? fiber connections ? iscsi ? AoE? Lots of options, but Jim doesn't really know. Whether or not he cares is a different story. I would say, he should not care about the technology used to build the solution, however he should care about the SLA his money is buying him. i.e. When you buy storage you are not only buying capacity, you're also buying redundancy and performance. Which is probably why many IT people care about the brand of the SAN storage, and the server to storage connectivity to begin with. What they really care about is "Is my data safe on that storage", "Will that storage deliver the performance I need". They really care about the SLA the cloud services provider is able to achieve
A common misconception about "cloud" is that cloud equals virtualization. This is not really true. You could very well build a cloud solution that does not use virtualization, instead a physical server would be powered on, PXE booted, deployed and be ready to service you! It would probably end up being too expensive, inflexible, and with limited billing options but it would not be impossible to build. That's why most commercial cloud vendors end up using some kind of virtualization technology as a building block in their "cloud compute service" i.e. the CPU and memory cloud layer. Virtualization is a neat trick to split up a physical server into multiple virtual machines, each running its own operating system and each having its own completely separate software stack. It enables the cloud service provider to carve up different sizes of virtual servers from the underlying physical servers. As a cloud consumer, you end up paying for only the size your workload needs.
The reason why cloud computing usually ends up being compared to the electricity grid is because both provide you with on-demand services meeting a certain SLA, and that you end up paying for only the amount you used. In case of electricity, you don't care what equipment the electricity company is using to generate your current, you only care that it meets a certain SLA (say 220V able to pump current of upto 100A, and being online for 99.999% of the time). You could run your own generators, but it would be inefficient (expensive) to do so, it would be a hassle to keep everything running, it would require skilled workers keeping everything online, it would not scale if you suddenly need more current! That is why most people do not run their own electricity generators and instead depend on the grid. However, with all the disadvantages mentioned, some businesses still choose to own and operate their own diesel engines for generating electricity at least as a backup solution. Why that is the case, is because those businesses are seeking more "security". They want to be in control, they don't want the electricity company to control such an important resource to their business. Everything mentioned so far about the electricity company applies to cloud vendors as well. Cloud vendors are the IT equivalent of the electricity grid. Running your own datacenter is the analogue of owning a diesel engine. Of course almost every business nowadays owns, builds and operates its own datacenter (diesel engine). However that might be changing rapidly, we're already seeing signs of workloads shifting into the cloud, which is what all the fuss is about. Cloud is the electricity grid of the IT world, and perhaps in the no too distant future it would be powering the vast majority of our personal and professional IT needs. Cloud is all about the commoditization of IT resources and services, coupled with a new business model for consumption lowering the entry barrier for smaller businesses and helping them focus on their core competency instead of focusing on IT
I hope to have helped shed some light on the topic, I'll probably be writing a part-2 soon touching on types and key properties of a cloud as well as adoption barriers and compromises. I understand many "cloud people" disagree about what qualifies as a cloud, it's definition and well basically everything about cloud is debatable, do let me know (politely :) if you disagree with any of the points mentioned. Let me know in the comments what you think are the key properties of a cloud
Update: Continue reading part 2