At Business Week, Sarah Lacy has a good article on the daunting challenges that software-as-a-service companies face as they try to build vibrant, profitable businesses. Some traditional software powerhouses, like SAP, are spending a lot to develop web versions of their applications, but they have little to show for the investments so far. Pursuing two radically different business models simultaneously, they’re running a race with their legs tied together.

Oracle, for its part, is deliberately moving slowly in shifting to the cloud model, preferring to milk the old, lucrative license-and-maintenance-fee model for as long as possible. Writes Lacy:

[Oracle] has offered a “hosted” version of its software for about 10 years, and CEO Larry Ellison clearly foresaw the on-demand wave, personally funding Salesforce.com and NetSuite. But spreading any kind of on-demand religion throughout his own company is another matter. Nowhere was this more clear than on Oracle’s most recent earnings call. Why isn’t Oracle a bigger player in on-demand software? It doesn’t want to be, Ellison told the analysts and investors. “We’ve been in this business 10 years, and we’ve only now turned a profit,” he said. “The last thing we want to do is have a very large business that’s not profitable and drags our margins down.” No, Ellison would rather enjoy the bounty of an acquisition spree that handed Oracle a bevy of software companies, hordes of customers, and associated maintenance fees that trickle straight to the bottom line.

More evidence of the challenges came yesterday with the announcement of Microsoft’s disappointing profits for the last quarter, attributable at least in part to the weak results of its online services business. The company has been spending billions building big utility data centers, but the revenues generated by all that capital investment remain paltry.

Anyone who thinks the software-as-a-service business is a gold mine for vendors is wrong. The economics are fundamentally different from those of the traditional software business – and not in a good way. As Lacy writes, the Web is “just as good at displacing revenue as it is in generating sources of it. Just ask the music industry or, ahem, print media. Think Robin Hood, taking riches from the elite and distributing them to everyone else, including the customers who get to keep more of their money and the upstarts that can more easily build competing alternatives.” Web apps remain a hard sell when it comes to big, conservative enterprises, and the capital and marketing costs are daunting, particularly if you’re running your own data centers. This revolution in business software will play out slowly and, for most suppliers, painfully.

So far the smartest players appear to be Ellison and his former protege, Marc Benioff of Salesforce.com. The unsentimental Ellison will wait until the profits from traditional software begin to decay, and then will buy his way into the software-as-a-service business, cherry-picking attractive suppliers. Benioff wisely chose the right target for his initial web app – salesforce automation, or CRM, which had become an advertisement for the flaws of large-scale enterprise software – and has built his business over the course of a decade through steady technical improvements and relentless marketing (aimed at both customers and investors).

“On-demand software,” Lacy writes, “has turned out to be a brutal slog.” Don’t expect it to get easier anytime soon. Success will come to a few smart, tenacious companies, but it will be hard-won.

Over at The Gaping Silence, Phil Edwards picks up the challenge of listing “a favorite album for every year of your life.” I’m definitely game for this game, though, like Phil and for precisely the same reason, I’m going to begin the list a few years after the year I was born. There are two restrictions: only one album per year (painful!) and no repeats of artists. Here goes:

1965: The Beatles, Rubber Soul

1966: The Yardbirds, Over Under Sideways Down (aka Roger the Engineer)

1967: The Velvet Underground, The Velvet Underground & Nico

1968: Van Morrison, Astral Weeks

1969, The Stooges, The Stooges

1970: The Grateful Dead, American Beauty

1971: The Faces, A Nod Is as Good as a Wink … to a Blind Horse

1972: The Rolling Stones. Exile on Main Street

1973: Mott the Hoople, Mott

1974: Roxy Music, Country Life

1975: Neil Young, Tonight’s the Night

1976: David Bowie, Station to Station

1977: The Sex Pistols, Never Mind the Bollocks, Here’s the Sex Pistols

1978: Wire, Pink Flag

1979: The Undertones, The Undertones

1980: X, Los Angeles

1981: Squeeze, East Side Story

1982: Richard and Linda Thompson, Shoot Out the Lights

1983: REM, Murmur

1984: The Replacements, Let It Be

1985: Husker Du, New Day Rising

1986: Elvis Costello, King of America

1987: The Smiths, Strangeways Here We Come

1988: John Hiatt, Slow Turning

1989: De La Soul, 3 Feet High and Rising

1990: Lou Reed and John Cale, Songs for Drella

1991: Matthew Sweet, Girlfriend

1992: Pavement, Slanted and Enchanted

1993: Cracker, Kerosene Hat

1994: Guided by Voices, Bee Thousand

1995: Oasis, (What’s the Story) Morning Glory?

1996: Belle and Sebastian, If You’re Feeling Sinister

1997: Bob Dylan, Time Out of Mind

1998: Billy Bragg and Wilco, Mermaid Avenue

1999: Supergrass, Supergrass

2000: Badly Drawn Boy, The Hour of Bewilderbeast

2001: The Strokes, Is This It

2002: Beck, Sea Change

2003: Kings of Leon, Youth and Young Manhood

2004: Arcade Fire, Funeral

2005: Sufjan Stevens, Come on Feel the Illinoise

2006: Cat Power, The Greatest

2007: The Thrills, Teenager

2008: My Morning Jacket, Evil Urges

Note for precisionists: Pink Flag came out in UK in late 77, but I think the US release was in 78, which allows me to sneak it in. If I’m wrong, let me know.

Having taken the Water Wiennies and the Jarts out of the closet, now seems like an ideal time to put Rough Type on ice for the summer. Posts will be rare for a spell.

The rise of cloud computing raises a lot of legal issues, and one of the thorniest involves the variations in national laws governing the storage and use of personal and other information. Controls on data threaten, for instance, to prevent certain information from being stored in data centers outside a user’s home country, hence eroding some of the efficiencies promised by a global cloud.

And yet does the location of the data center really matter? I was listening recently to comments by an executive from Mozy, the online backup service. Noting that Mozy allows its customers to use a personal encryption key to encrypt the data that they store with the company (making it impossible for Mozy or anyone other than the owner to decipher it), he asked whether such encrypted information resides legally where the data is stored or where the encryption key is held. It’s an interesting and important question, as encryption promises to separate “information” from the bits of data that carry it.

Back in 1993, Eric Schmidt, then the Sun kid, now the Google dad, wrote in an email to the telecosmic George Gilder: “When the network becomes as fast as the processor, the computer hollows out and spreads across the network.”

The Economist closed its recent article on cloud computing by sketching out a picture of where this technological trend is leading:

In future the geography of the cloud is likely to get even more complex. “Virtualisation” technology already allows the software running on individual servers to be moved from one data centre to another, mainly for back-up reasons. One day soon, these “virtual machines” may migrate to wherever computing power is cheapest, or energy is greenest. Then computing will have become a true utility—and it will no longer be apt to talk of computing clouds, so much as of a computing atmosphere.

Bill Thompson has noted that, as governments and corporations become more aware of, and either more nervous or more excited about, the ability to shift data and data processing effortlessly across borders, the “computing atmosphere” may get very foggy very fast, with the cloud turning “into a miasma … heavy with menace.” Through the noxious mist, Thompson can even hear hounds baying.

James Urquhart describes how the idea of the itinerant computer – a feather of software code wafting from data center to data center – is rapidly becoming, at a technical level, a reality:

The concept of “moving” servers around the world was greatly enhanced by the live motion technologies offered by all of the major virtualization infrastructure players (e.g. VMotion). With these technologies (as you all probably know by now), moving a server from one piece of hardware to another is as simple as clicking a button. Today, most of that convenience is limited to within a single network, but with upcoming SLAuto federation architectures and standards that inter-LAN motion will be greatly simplified over the coming years.

Once you’re able to “move your complete processing state from place to place as processing requires, without losing a beat,” a kind of legal arbitrage becomes possible:

So, run your registration process in the USA, your banking steps in Switzerland, and your gambling algorithms in the Bahamas. Or, market your child-focused alternative reality game in the US, but collect personal information exclusively on servers in Madagascar. It may still be technically illegal from a US perspective, but who do they prosecute? … I know there are a million roadblocks here, but I also know both the corporate world and underworld have proven themselves determined and ingenious technologists when it comes to these kinds of problems.

Gregory Ness suggests that the world’s new spice trails may be computing trails:

Over the last thousand or so years we’ve seen spice trails generate massive wealth in the Middle East, shipping lanes open up sizable agricultural and mining projects in less-developed regions; and steam, factories and electricity generate yet another wave of disproportionate winners. The wealth of North America in the last two decades has increasingly come from information technology and energy as manufacturing has chased low cost labor to nations with lower standards of living.

When spice trade routes shifted to the ocean the overall Middle East economy went from optimism to despair, from science and enlightenment to xenophobia. Factories gradually replaced artisans around the world and agriculture went through a series of cycles depending on access to trade routes and distances from markets (in addition to weather and practices, etc). A coming shift to cloud computing could be as influential in wealth distribution as any previous shift in factors of production and access.

Ness concludes: “It may only be a matter of time before we hear a politician talk about the evils of ‘cloudsourcing.'” For the moment, though, they’re celebrating in Lenoir, under an almost cloudless sky.

Wikipedia has long promoted itself as “the free encyclopedia that anyone can edit.” But Jimmy Wales offers a new, circumscribed slogan in a column in today’s Observer. Wikipedia is now, according to Wales, “the online encyclopedia in which any reasonable person can join us in writing and editing entries on any encyclopedic topic.” The old slogan was the language of the bazaar. The new one is the language of the club.

(Disclosure: I’m on Encyclopedia Britannica’s editorial board of advisors.)

Alan Taylor’s photojournalism blog, The Big Picture, has been receiving some well-deserved praise. Check it out.