A lot of people are talking about cloud computing these days. It's a fuzzy term that's somewhat easier to understand only if you know that cloud is a word techies use to refer to the Internet. Cloud computing works like this: Instead of buying, installing, and managing your own servers to run applications, you rent server time from Microsoft, Amazon, Google, or another company. Then, you manage the servers over the Internet while paying only for the processing and storage you actually use.

Cloud computing offers more flexibility than the traditional setup. You could, for instance, rent 10 servers for when your website traffic peaks at 7 p.m. but scale back to just two for when traffic wanes at 2 a.m.

This promise of more flexibility and lower costs has grabbed the attention of many business owners. And big technology companies are ramping up their cloud-computing offerings in response. Last fall, over the course of a few weeks, Amazon moved its Elastic Compute Cloud, or EC2, service from beta testing into full production; Salesforce.com announced it would expand its cloud-computing platform; and Microsoft unveiled its cloud operating system, Windows Azure. Microsoft's foray into the market is of particular note, because it's a big shift for the world's dominant traditional software company. "That Microsoft has wholeheartedly embraced the cloud is an indication that it's here," says Dave Girouard, president of Google Enterprise.

Cloud computing is still very new, and building applications that work on cloud servers requires technical chops, says Frank Gillett of Forrester Research. What's more, the services require a range of programming skills. Microsoft's Azure uses Microsoft's .NET developer platform; Google's App Engine uses Python, a popular open-source programming language; and Salesforce.com's service uses its proprietary Apex development language. Amazon's EC2 offers more programming flexibility, although it still requires coding skills.

So, don't expect to just shut down everything and move to the cloud. Moving your data, for one thing, can prove challenging. And if your company has just dropped a lot of money on new software and hardware, it may make sense to get some use out of them first. Still, cloud computing makes sense for many companies. Here are the sorts of businesses that probably belong in the cloud:

Tech start-ups that could take off quickly

Using cloud-computing services makes it easier to scale up technology to handle a big increase in demand. That's why Gad Barnea, whose air travel start-up FlyMiwok launches this month, decided to try cloud computing. The Burlingame, California, company sells seats on charter flights throughout Southern California. FlyMiwok calculates the price on the fly, based on demand.

Making these calculations and coordinating the flights takes some fancy software, and if the idea takes off, it could take a lot of hardware, too. Barnea hopes to have operations on both coasts and in some Midwestern markets by 2010. If that happens, he estimates that building a data center with 10 servers and other equipment to handle peak demand might cost up to $250,000, not including facility costs or paying personnel to manage the servers.

Barnea had done some marketing consulting for GigaSpaces, a firm whose software helps companies move to cloud-computing services, and he thought cloud computing could work for his company. He worked with GigaSpaces to get FlyMiwok set up on Amazon's EC2 service. So far, using Amazon's processors is costing FlyMiwok an average of 80 cents an hour per server, and Barnea expects to pay about $28,000 the first year. "It saves us a lot of money," he says.

Companies that churn through a lot of data -- but only once in a while

When a big computing job comes around once in a blue moon, it doesn't make sense to invest in a huge data center. That's why TC3 Health, a Costa Mesa, California, company, moved its technology to the cloud. TC3's software checks for fraudulent or duplicate insurance claims. Not long ago, an insurance company asked TC3 to scan several years' worth of old claims -- more than 20 million in all. After TC3 found it could have saved the company more than $20 million, other companies began calling, seeking the same service. No one wants to turn away business. But combing through that much data would have meant spending up to $1 million to expand TC3's data center, says Paul Horvath, the company's CTO.

Horvath had heard about Amazon's cloud-computing services and thought they were worth a try. He hired RightScale, a consultant Amazon recommended, to set up TC3's software on Amazon's servers. "We had no idea how to do this stuff," says Horvath, "and we weren't interested in learning." TC3 switched last year and has spent $200,000 to $250,000 on setup and cloud-computing services. It is now able to fulfill more of those big customer requests. The company's software interface is the same as before, says Horvath. The only difference is that customers get results a lot faster.

Seasonal businesses

Any company that has a busy season is probably a good candidate for cloud computing, because it allows you to ramp up your tech temporarily. For instance, an accounting firm could get more computing power to handle the crush of tax season without being stuck with hardware it doesn't need in July. Or a company that makes chocolates could add servers to process more Valentine's Day orders and then scale back in March.

Even if cloud computing works for your business, moving to the cloud isn't easy. That's why a rapidly growing number of service companies -- including RightScale, Elastra, Enomaly, and ParaScale -- have cropped up to help companies make the switch. But keep your expectations realistic, says Peter O'Kelly, an independent analyst who has worked in the software industry for 25 years. If the vendor's cloud servers go down, a company's entire business could be forced to a halt until the service is back online. Google and Amazon both had outages last year. And companies need to choose service providers carefully, because they may not all survive the economic downturn. Still, O'Kelly says many of the drawbacks to cloud computing are being addressed. Having one's head in the clouds is looking smarter every day.