At its most basic, cloud computing is moving applications accessible from our internal network onto an internet (cloud)-accessible space. We're essentially renting virtual machines in someone else's data center, with the capabilities for immediate scale-out, failover, and data synchronization. In the past, having an Internet-accessible application meant we were building a website with a hosted database. Cloud computing changes that paradigm–our application could be a website, or it could be a client installed on a local PC accessing a common data store from anywhere in the world. The data store could be internal to our network or itself hosted in the cloud. The following diagram outlines three ways in which cloud computing can be utilized for an application. In option 1, both data and application have been hosted in the cloud, the second option is to host our application in the cloud and our data locally, and the third option is to host our data in the cloud and our application locally.

The expense (or cost) model is also very different. In our local network, we have to buy the hardware and software licenses, install and configure the servers, and finally we have to maintain them. All this counts in addition to building and maintaining the application! In cloud computing, the host usually handles all the installation, configuration, and maintenance of the servers, allowing us to focus mostly on the application. The direct costs of running our application in the cloud are only for each machine-hour of use and storage utilization.

The individual pieces of cloud computing have all been around for some time. Shared mainframes and supercomputers have for a long time billed the end users based on that user's resource consumption. Space for websites can be rented on a monthly basis. Providers offer specialized application hosting and, relatively recently, leased virtual machines have also become available. If there is anything revolutionary about cloud computing, then it is its ability to combine all the best features of these different components into a single affordable service offering.