The major differences between grid and cloud is that cloud has "unlimited" and momentary scalability. If demand explodes for your service, you can have 30x the capacity inside of 5 minutes. When it's a big VMS or a local Xen cluster, there's a very realistic ceiling to how high you can scale based on how much physical hardware you own (or lease). If there's a demand explosion, your response time past that ceiling is weeks or days (or if you pay a very high price for the privilege, hours - if you're lucky, realistically when we had a 4 hour hardware response time, it still always managed to end up closer to 24 hours). If you colocate, you might even have to physically relocate to a new cage, which involves downtime or capacity reduction.
Also with cloud services, if demand subsides, you can scale back down, and you paid for that extra capacity with an hourly granularity. In addition, this scalability is controllable with software, you create OS images that are custom tailored to your software preinstalled and configured, then just spin them up and down as demand requires. There's still a capacity ceiling, but because that ceiling is shared across thousands of other customers, it's much, much higher than you probably have the resources to dedicate in your own datacenter or colo location, and doesn't require a substantial up-front financial obligation.
So cloud stuff isn't really a fad, it's amortizing the costs associated with huge capacity options across a large number of customers. It's not something you couldn't do before, it's just a way to have access to it without a huge initial investment. It introduces new risks and points of failure, but also makes it so you can focus on your software stack rather than having to hire network and operations engineers to manage physical hardware (or having to pay for new capacity with a monthly granularity such as with hosted hypervisors, and also having to spin up a clean image and install your software stack before it can come online, vs spinning up a pre-imaged OS which is ready to roll as quickly as it can boot).
All that said, that doesn't mean there's no cloud bubble. A lot of investors right now want to hear that word in your sales pitch. If they don't hear it, and they don't hear "social" as well, you probably don't meet the profile most of their clients have asked them to invest in. Cloud isn't some magical unicorn which makes problems go away. It solves certain problems and introduces new problems. A large cloud cluster running 24x7 is more expensive and performs worse than the same capacity as a dedicated colo. If your solution to cloud is just to use it as a VPS, you're going to pay out the nose for that, and most people end up doing exactly that. They don't put the time into learning how to create custom images, they don't script server management, the only way they can bring more capacity online is if an engineer sits down and opens the web management console, spins up some instances, patches those instances, installs the right software, configures that software, and manually brings it online. Basically a lot of people treat cloud like grid, and they end up with the downsides of both.