wellington cloud
wellington cloud

Four years ago Microsoft lost its mojo. The software giant had failed to compete in web search.

People questioned whether Microsoft was on an IBM-style path to irrelevance. When the phone business flopped, it looked like Microsoft’s time in the sun was over.

Today it is back. The 2017 Microsoft is a different beast, the main reason for its revival is a successful transition to selling cloud computing services. Microsoft’s birth isn’t yet on the same scale as Apple which came back with the iPhone, but that can still happen.

This week Microsoft reported quarterly profits that are more than twice the level of a year earlier.

It’s not all good news. Some of the jump was down to the company realising a tax benefit after writing off its failed mobile phone business.

Fast growing cloud transition

Yet that’s the past The important part of the quarterly announcement is that Microsoft’s cloud business is growing at a clip. That was enough to send the share price up three percent.

This wasn’t the first quarter where Microsoft’s cloud business was the star of the show. It’s been climbing for years now. In the latest quarter Intelligent Cloud revenue was up 11 percent to US$7.4 billion. Revenue for the company’s Azure cloud services was up almost 100 percent.

While Azure still trails behind Amazon Web Services, there is clear blue sky between Microsoft and the next set of cloud service providers. Being second in the most important market of the day is a huge win for Microsoft.

Azure profits

At the same time, cloud economics means it is close to a winner takes all game. Amazon and Azure share almost all the cloud profits.

The other cloudy good news from Microsoft is that revenue from the cloud version of Office 365 went past traditional software sales for the first time. There are now 90 million Office 365 users on iOS and Android. That is a big thumbs up for CEO Satya Nadella’s decision to support non-Microsoft operating systems.

Although Microsoft is doing a better job of transforming than rivals like IBM, Oracle or Google, it isn’t in the clear yet. Sales of Surface devices fell two percent during the quarter. Meanwhile enterprise service revenues fell. Yet it appears to be keeping pace with AWS, that’s something no-one else can manage.

Office 365 businessMicrosoft partners have warned enterprise cloud service customers to expect a 22 percent price increase from April 1.

In a message to its customers one Microsoft partner says the increase applies to Office 365, Azure, CRM-Online, Enterprise Mobility Suite, Intune and other enterprise online services.

The customer message reports Microsoft saying

… this is an adjustment to more closely align prices to the NZ market and reflects the rapid evolution of cloud services and the dynamic nature of the market.

In Microsoft’s defence, the partner points out it is years since Microsoft prices have risen and that there is now more value in the products.

It goes on to say that a 22 percent price increase does not alter the financial sense of a subscription.

real price increase

While these points are both true, the price rise is still a long way ahead of New Zealand inflation. At the time of writing inflation is close to zero.

It is also out of line with the recent fall in the value of the New Zealand dollar.

Companies can renew before the end of the month and pay the existing rate.

Frazer Scott, director of marketing and operations, Microsoft New Zealand says:

Microsoft is committed to delivering state-of-the-art security and compliance enhanced cloud computing solutions. As part of our on-going business process and in light of the rapid evolution of the local market dynamics, Microsoft will adjust prices for company’s enterprise cloud products in New Zealand.

Microsoft’s price increase underlines the risk companies take when adopting cloud services. Although there’s no absolute lock-in, moving a company that depends on, say, Outlook.com for its email to an alternative service, is far from trivial.

Many businesses will feel they have little option but to swallow this price rise. Yet Microsoft is taking a risk here. If customers fear that subscription software prices will ratchet up in coming years, they’ll look elsewhere. A 22 percent increase tests the limits of what customers are happy to accept.

Intellipath

A partnership with Australian national network provider Nextgen means Intellipath has expanded its reach creating what may be the region’s largest bandwidth-on-demand service.

Intellipath previously only offered its services in New Zealand, the west coast of the USA, Sydney and Melbourne. The deal with Nextgen means it now covers the rest of Australia including Perth, Brisbane, Canberra and Adelaide.

It now reaches 45 Australian data centres and a total of 63 worldwide. The network has connections to the main Australian data centres including Metronode, Equinix and NextDC. It reaches all the main cloud services including AWS and Azure.

IntelliPath is a subsidiary of Vibe Communications. In effect, it offers a wide-area-network as a service.

This works in much the same way as companies already buy cloud computing services on demand. IntelliPath allows them to create a contract-free communications link in a matter of seconds.

In practice it means an organisation can respond immediately to a business need or an emerging opportunity, only paying for the communications services they consume at the time.

Forget Microsoft Surface, Lumia and Windows. Today it is all about Microsoft cloud and subscriptions.

Surface Pro tablets did well in the company’s most recent financial quarter. Microsoft says it has strong orders for the Surface Book. Yet the big story is elsewhere.

Investors are more interested in the Microsoft cloud progress: Azure grew 140 percent last year.

Office 365 subscriptions continue to surge. The interesting thing here is that Office 365 has broken out of the Windows market. The Android and iOS apps are a huge success and they, in turn, generate subscription revenue.

Microsoft’s quarterly financial result highlights success with services sitting on top of Azure and Windows.

Reaction to the result was upbeat given stalling phone sales and traditional PC sales in a tail spin. Microsoft now only accounts for one percent of the global phone market. PC sales are down ten percent on last year.

Microsoft has shown a remarkable ability to reinvent its business to cope with change. Looking back Satya Nadella’s appointment and his focus on a Microsoft cloud looks like a masterstroke. The only fly in the oinment is falling margins. That’s going to mean cultural changes throughout the business.

 

You’ve got to know when to hold ’em and know when to fold ’em. Know when to walk away. Know when to run.

HP did the right thing telling customers it will “sunset” its Helion public cloud service in January[1].

Global scale public cloud is a high stakes poker game. Two companies, AWS and Microsoft, hold all the best cards and they have enough cash in the pot to tough it out.

There may be room for one or two more second tier global players, not the dozen or so still snapping at the leaders’ heels.

Brutal economics

Cloud requires huge upfront capital investment and accepting that margins will be squeezed to the bone. There is no room for misteps[2].

The only likely candidate to join AWS and Microsoft at the top table is Google, and that is by no means certain. IBM spent US$5 billion buying its way into the cloud. It is still a distant runner-up.

This was always going to be the year of the public cloud shakedown. Spending on public cloud infrastructure is up 32 percent from last year to US$16.5 billion (Garter numbers). The nature of the market means a few public cloud vendors earn rivers of gold, the rest barely break even.

Winner takes all

Microsoft reports 135 percent growth in its Azure cloud sales. It bundles other services into its overall cloud revenue which now sits at more than US$8 billion a year. AWS reported annual growth of 78 percent.

Instead of banging its head against a brick wall, HP will switch its efforts to helping customers build their own private clouds. This mainly means selling hardware, HP Enterprise will be happy with that[3].

HP also aims to help customers run their software on services such as AWS and Microsoft Azure.

Still opportunity in enterprise cloud services

In other words it will become a broker, integrator and a cloud services provider.

The Helion Network, a group of HP partners who host client systems on HP Helion hardware will live on.

This is smart thinking. Cloud margins are tiny and require large investment — that’s the last thing the new HP Enterprise organisation needs as it reboots. It can play to the company’s strengths which lie in selling hardware and managed IT.


  1. Presumably “sunset” means close.  ↩
  2. HP Helion ran into technical trouble. It was based on the open source OpenStack software which, in hindsight, may not have been the best choice.  ↩
  3. Although happy isn’t a word one associates with selling enterprise hardware anymore..  ↩