What Is Cloud Computing? Types, Examples and How It Works

What Is Cloud Computing?

Cloud computing is a way of using computers you do not own, over the internet, as and when you need them. The US National Institute of Standards and Technology (NIST) defines it as a model that gives convenient, on-demand network access to a shared pool of configurable computing resources, such as networks, servers, storage, applications and services. These can be set up and released quickly with little management effort.¹

In everyday terms, “the cloud” is simply other people’s computers in large data centers. When you store photos online, stream a film or use a web-based email account, you are using cloud computing.

For businesses, the cloud means they can run websites, apps and data systems without buying and maintaining their own servers. They rent capacity from a provider and scale it up or down as needed.

The Five Essential Characteristics

NIST lists five features that make a service true cloud computing rather than ordinary hosting.¹

The Three Service Models: SaaS, PaaS and IaaS

Cloud services come in three main layers, depending on how much the provider manages for you.¹

• Software as a Service (SaaS): you use the provider’s finished applications over the internet, without managing anything underneath. Web email, online office suites and customer management tools are examples.
• Platform as a Service (PaaS): you deploy your own applications on the provider’s platform, using its tools and programming languages, without managing servers or operating systems.
• Infrastructure as a Service (IaaS): you rent raw computing power, storage and networking and run your own software, including operating systems, while the provider runs the hardware.

Most people use SaaS every day, often without thinking of it as cloud computing. Developers and IT teams use PaaS and IaaS to build and run the apps everyone else uses. The further you move from IaaS toward SaaS, the less technical work you do yourself, but the less control you have over how the system is set up.

The Four Deployment Models

NIST also describes four ways a cloud can be set up, depending on who shares it.¹

Many organizations end up with a mix: some systems in a public cloud, some in a private one and some still on their own premises. Moving data and applications between them is part of what makes a hybrid cloud useful.¹

Everyday Examples of Cloud Computing

You probably use the cloud dozens of times a day without noticing.

• Email and documents: web-based email and online document editors store everything on the provider’s servers.
• Photo and file storage: phone backups and online drives keep copies of your files in data centers.
• Streaming: films, music and games stream from cloud servers to your device.
• Online shopping and banking: the websites and apps run on cloud infrastructure behind the scenes.
• AI tools: chatbots and image generators run on large cloud data centers, not on your device. Our explainer on large language models covers why they need so much computing power.

Why Businesses Use the Cloud

The cloud changes how businesses pay for and manage technology.

• Lower upfront costs: no need to buy servers before you know how much you will need.
• Scale on demand: add capacity for busy periods and release it afterwards.
• Speed: new systems can be ready in minutes rather than weeks.
• Access anywhere: teams can work from any location with an internet connection.
• Less maintenance: the provider handles hardware, power, cooling and many updates.

For a small business, SaaS tools can provide accounting, email, file sharing and customer management for a monthly fee per user, without an IT department. That lets a team of a few people use the same kind of software as a large company.

Costs: Cheaper or More Expensive?

The cloud turns big upfront purchases into ongoing bills, and whether that saves money depends on how you use it. This shift is often described as moving from capital spending to operating spending.

Pay-as-you-go pricing is efficient when demand varies or is uncertain. But costs can grow quietly: unused servers left running, storage that is never cleaned up and services billed per user can add up. Regular reviews of what you pay for, and switching off what you do not use, keep bills under control. Our explainer on cash flow covers why predictable monthly costs matter to a business.

For steady, predictable workloads, some organizations find that owning hardware costs less over time. Many choose a mix, using the cloud where flexibility matters most.

Security in the Cloud: A Shared Job

Moving to the cloud does not hand over all responsibility for security. Providers secure their data centers, hardware and core services. Customers remain responsible for who can log in, how services are configured and how their data is protected. This split is usually called the shared responsibility model.

NIST’s guidance on public cloud security highlights considerations organizations should weigh before outsourcing data, applications and infrastructure.² The US Cybersecurity and Infrastructure Security Agency (CISA) publishes a cloud security reference architecture for government agencies, which describes a shared risk model for cloud adoption.³

Many cloud data breaches come from customer-side mistakes, such as storage left open to the public or weak passwords. The basics matter most:

• Turn on multi-factor authentication for every cloud account, especially administrators.
• Check sharing and access settings so files and storage are not public by accident.
• Give people only the access they need, and remove access when they leave.
• Back up important data in a separate place, in case of deletion or ransomware.
• Watch for phishing, which often targets cloud logins. Our explainer on phishing explains how to spot it.

Risks and Downsides

The cloud brings real benefits, but also trade-offs to plan for.

• Outages: if a provider has a problem, many services can go down at once.
• Dependence on the internet: no connection can mean no access.
• Vendor lock-in: moving large systems from one provider to another can be hard and costly.
• Data location and privacy: some data must be stored in certain countries or handled under specific rules. NIST notes that customers may be able to choose a broad location, such as a country or data center region.¹
• Cost surprises: usage-based bills can rise faster than expected.

Cloud Computing and the Environment

Data centers use large amounts of electricity and, in many places, water for cooling. As demand for cloud services and AI grows, so does the energy needed to run them.

Large shared data centers can be more efficient than many small server rooms, because they are designed for cooling and use their hardware more fully. But efficiency does not remove the impact. Switching off unused resources and choosing only the capacity you need cuts both your bill and your footprint.

Some providers publish information about their energy use and the regions where they run on cleaner power. If this matters to your organization, ask providers for that information when you compare them.

Cloud Computing and AI

Modern AI depends heavily on cloud computing. Training and running large AI models needs huge amounts of specialized computing power, which few organizations could afford to buy on their own.

Cloud providers rent this capacity by the hour, which lets startups and researchers use powerful hardware without owning it. Most AI tools that businesses use are also delivered as SaaS. Our explainers on AI and machine learning cover how these systems work.

A Short History of the Cloud

The idea of renting computing power is older than the word “cloud”. In the early days of business computing, companies shared time on large central computers. Later, web hosting let businesses rent space on someone else’s servers to run a website.

What changed with modern cloud computing was self-service and scale. Customers could create and remove servers in minutes through a website, pay only for what they used and grow almost without limit. NIST published its widely used definition in 2011 to give governments and businesses a common language for these services.¹

Since then, the cloud has become the default way to build and run most new software, from small apps to the largest websites in the world.

A Worked Example: A Growing Online Shop

Here is an illustration of how a small business might use the cloud as it grows. A new online shop starts with a SaaS store builder. It pays a monthly fee, and the provider handles the website, payments and hosting.

As sales grow, the shop adds SaaS tools for accounting, email marketing and customer support, all used through a web browser. During a busy holiday season, its store builder automatically handles the extra visitors, because the provider’s infrastructure scales on demand.

Later, the shop hires a developer to build a custom app. Rather than buying servers, the developer runs it on a PaaS, so the team can focus on the app rather than the machines. At each step the shop pays for what it uses and never manages a data center, which is the main promise of the cloud.

Moving to the Cloud: Practical Steps

Moving existing systems to the cloud works best as a planned, step-by-step project.

• List what you have. Note each system, who uses it and what data it holds.
• Start with simple wins. Email, file sharing and office tools are usually the easiest to move.
• Plan the data move. Decide how data will be transferred, checked and backed up during the switch.
• Set up security first. Configure accounts, multi-factor authentication and access rights before moving sensitive data.
• Train people. New tools only help if your team knows how to use them safely.

How to Choose a Cloud Service

Start with what you need, then compare providers on more than price.

1. Define the job. Do you need a finished tool (SaaS), a place to run your app (PaaS) or raw infrastructure (IaaS)?
2. Check security features. Look for multi-factor authentication, encryption, access controls and clear audit logs.
3. Understand the pricing. Know what you pay for: users, storage, computing time or data transfer.
4. Read the service terms. Check uptime commitments, support and how you can export your data if you leave.
5. Plan your exit. Make sure you could move your data elsewhere without excessive cost.

Key Terms Explained

• Data center: a building full of servers, storage and network equipment.
• SaaS, PaaS, IaaS: software, platform and infrastructure offered as a service.
• Elasticity: the ability to add or remove capacity quickly as demand changes.
• Shared responsibility model: the split of security duties between provider and customer.
• Vendor lock-in: difficulty switching providers once systems depend on one.

The Bottom Line

Cloud computing lets people and businesses use powerful technology on demand, without owning the machines behind it. Understand which service model you are using, keep an eye on costs and remember that security is shared: the provider runs the infrastructure, but your accounts, settings and data are still yours to protect. For more, browse our tech and AI explainers.

Protecting cloud accounts starts with sign-in. Our explainer on two-factor authentication covers the strongest methods.

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