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Cloud Continues to be the centerpiece of Microsoft's growth strategy

23 October 2015 Jagdish Rebello Ph.D.

On October 22nd Microsoft reported a strong growth in its earnings for the first quarter of fiscal year 2016, driven primarily by the outstanding performance of its cloud business. While overall revenues for the company in the quarter declined by 12% to $20.38 billion - from $23.2 billion in the first quarter of fiscal 2015, revenues from the cloud computing business unit grew by 8 percent, to $5.9 billion. Net income for the company grew from $4.54 billion in the first quarter of fiscal year 2015 to $4.62 billion in the first quarter of the current fiscal year.

It is crystal clear that the cloud computing business will have to be the cornerstone of Microsoft growth strategy. In an environment where the global PC continues to struggle, Microsoft saw revenues from the sales of Windows OS to PC manufacturers decline by about 6%. In addition, the company has promoted free upgrades of its new Windows OS, Windows 10, to consumers with the goal of trying to get increased adoption of the software by users and increased traction among the application developer community. In addition Microsoft reported disappointing sales of its Surface devices - down from $908 million a year ago to $672 million - and a 54% drop in revenues from its mobile phone business.

Microsoft's Intelligent Cloud segment, includes server products and cloud services such as Windows Server and Azure. Microsoft reported that users for it cloud business also doubled when compared with a year ago. While Microsoft continues to face extremely strong competition in the cloud services market from established players like Amazon Web Services (the unquestioned market leader) Google and service providers like Verizon, AT&T and Vodafone, the cloud represents a very strong growth opportunity for Microsoft.

Enterprise are increasingly migrating more and more of their IT spend to the cloud. The cloud service - defined as on-demand, dynamic provisioning of data, storage, computing power and services - is currently in the very early stages of growth. While the cloud currently still represents a very small portion of the total IT spend, it is by far, one of the fastest growing segments of the $1+ trillion of the global enterprise IT spend. IHS forecasts that global enterprise IT spending on cloud based services including SaaS, IaaS, PaaS etc will grow from less than $150 billion in 2015 to over $210 billion in 2018.

Consequently it is extremely critical for a company like Microsoft to focus more its growth strategy on the enterprise cloud. Traditionally Microsoft has had very a strong relationship with enterprise IT. While Windows OS powers over 90% of the enterprise desktops and laptops used today, Windows is also the O/S in about 44% of the enterprise server market. And Microsoft has traditionally done an excellent job of packing a host of enterprise IT solutions including virtualization, CRM software, document sharing services etc.

Microsoft now needs to leverage these relationships, expertise and services to aggressively grow its cloud service business with enterprises. The company has committed heavily to a cloud strategy with huge capital investments in cloud data centers around the world. But it is facing competition from players like Amazon Web Services who are offering aggressively pricing and easy to use development tools - targeted primarily at small to medium businesses. On the other hand larger enterprises still remain extremely cautious about migrating a lot of their sensitive IT services to the cloud.

In surveys of enterprise IT managers in the US, conducted by IHS, security concerns with respect to data security and compliance with legislation and corporate policy are critical concerns for IT managers. In addition, compatibility of the cloud offering with the existing in-house infrastructure and concern over application performance are concerns voiced by enterprise IT managers.

If Microsoft can continue to successfully speak to these concerns when dealing with IT clients it should be well positioned to grow in the explosive growth cloud IT market.

IHS provides detailed coverage of Data Centers, Cloud & IT Infrastructure. Learn more here.

Jagdish Rebello, PhD is a technology senior director for IHS
Posted on 23 October 2015

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