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Oh, it's certainly about cost. When you talk about paying for your own transit, your own power, cage space, and remote hands, cloud providers can be significantly cheaper than owning the hardware. You also lose the administrative overhead of having to perform drive swaps when your units degrade -- it's just computing capacity that exists with a minimum of hassle to you. I think if you add up all of the variables, cloud can (and does) come out more cost-effective.

I think private clouds are fantastic for established stuff, and many companies use public clouds to their benefit as well.

I added this in an edit after you replied, but cloud is a term that is difficult to nail to the wall: my explanation to people that I like to run with is that the cloud is a way to think about your architecture.

Rather than have a DNS box, two Web servers, a DB box, and so on, then another server for every development environment, virtualizing the hardware makes a lot of sense. You get a lot more traction out of each U, and with a large number of of-the-shelf utilities, you can automate the hell out of that. Need a clean test environment to try an installation of your software? There are ways to accomplish that in minutes, and dispose of it and reuse the space. That to me is a cloud. Virtualization and automation on top of it. That's what Linode has been doing for nearly eight years now, so it's arguable that Linode pioneered the cloud space. In 2003, it was just called VPS hosting.

Integrating a public cloud and a private cloud makes a lot of sense, and a lot of established big-iron is taking this approach. Big players are realizing that the cloud makes a lot of sense, which we see with HP's announcement that they intend to enter the cloud market.