Microsoft can’t sell all that many tablets or smartphones, but there’s one sector where the tech giant is showing surprising strength: cloud services.
Microsoft’s commercial cloud revenue was up 103 percent in the quarter ended this past September. The commercial cloud segment consists mainly of subscriptions to Windows Azure, an application hosting service, and to Office 365, an online version of Microsoft’s ubiquitous desktop productivity suite. Microsoft said in a call with Wall Street analysts that both Azure and Office 365 posted triple-digit percentage increases in revenue and increased profitability as gross margins expanded.
The growth is evidence, at least to a certain extent, that Microsoft is pulling off the delicate task of converting its strong share of the business software market -- which includes things like databases and server operating systems -- into a strong share of the market for business cloud computing platforms, where such software is installed and managed by Microsoft on Microsoft’s own servers. Microsoft’s cloud offerings were late to the game after younger, web-native entrants, particularly Amazon.com, created and defined the market.
“As CIOs increasingly look to capitalize on the opportunities of cloud computing, we’re confident they will continue to look to Microsoft for their IT solutions,” Microsoft CFO Amy Hood told analysts.
Amazon remains the dominant player in cloud hosting, with offerings like its Elastic Compute Cloud (EC2) and Simple Storage Service (S3). Earlier this year, Forrester estimates Amazon’s share of the market at 71 percent, versus 20 percent for Microsoft’s Azure.
But it’s worth noting that while much of the attention and hype around cloud services goes to startups like Box and Dropbox and to internet pioneers like Amazon and Google, many of the actual dollars spent are quietly flowing to stodgy old Microsoft thanks to the company’s dominance of the unsexy business of selling to corporate IT departments. As risk-averse non-tech businesses begin to embrace the idea of ditching their own servers for hosted “cloud” offerings, it is often more cost-effective, not to mention comforting, to simply switch over to Microsoft’s offering, even if Amazon was the original innovator in cloud platforms and has a longer track record in that particular sector.
San Francisco-based talent marketplace Kaggle, for example, switched from Amazon EC2 to Windows Azure because Microsoft’s system offered better support for C#, a Microsoft programming language used by Kaggle’s engineers.
The same seems to be holding true for many people switching from desktop productivity software to web apps. Some are switching to Google Apps, a pioneer of the genre, but many are apparently sticking with Microsoft and getting into cloud computing via Office 365.
To further cement these gains, Microsoft has begun integrating Azure directly into some of its business software, including the SQL Server database, an approach it calls “hybrid cloud computing.” If successful, the hybrid approach would give Microsoft an advantage Amazon is unable to match, since it lacks any pure business software products. In the meantime, it helps minimize the extent to which Microsoft’s cloud service cannibalize sales of its business products.
“Within especially our server business, our ability to power the cloud whether you want to run it, you want a service provider to run it, or you want to use ours is really an incredibly powerful story,” Hood told analysts.
Hood’s quote, like much of Microsoft’s talk around cloud services, sounds like so much corporate jargon. But that kind of talk is music to the ears of the executives who buy software hosting in bulk, and, as its new numbers show, Microsoft is perfectly attuned to them.
