Late last week marked an interesting series of coincidences, at least for me: On Thursday, Microsoft held its annual Financial Analyst Meeting (or FAM), an event which sounds irrelevant on the surface but is in fact an excellent guide to the company's various market strategies. And I finally formalized something that's been kicking around in my head for some time (and been hinted at in various recent commentaries): During a talk in Amsterdam, I wondered aloud whether Microsoft would be subsumed by the growing trend towards cloud computing.
The 2009 FAM marked Microsoft's most stunning and explicit support for cloud computing yet, and this suggests that the company is, in fact, much more serious about embracing this future than may understand. In fact, I was among the doubters as recently as a week ago, and had titled my presented, tongue-in-cheek, as "Is Microsoft F*%&ed?" (a title I likely wouldn't have foisted on an American audience). The answer to this rhetorical question is an emphatic no. In fact, if you actually look at what it is Microsoft is doing to embrace the cloud, the strategy is both clear and logical.
But first, a quick bit of perspective: I feel we're in a transition phase, where computer users of all stripes are utilizing a mix of both local- and cloud-based applications and data. As Microsoft CEO Steve Ballmer noted at FAM, "Even as people go to the cloud, you see people writing Windows applications as a front end to a number of these things."
But looking forward, this mix will shift inexorably towards the cloud. Yes, there will always be a need for local storage, especially for regulatory and legal reasons in business, but for all effects and purposes, the future is cloud-based. This isn't a bit of temporary marketing silliness. It's the future.
But don't take my word for it. In his address at FAM, Ballmer address the cloud as follows. "We're embracing the cloud," he said simply. "Our cloud story today is actually pretty developed. It's not fully implemented, but it is actually pretty developed, and we've got a lot of hard execution in front of us."
For Ballmer, the big question, of course, is how Microsoft will profit from the cloud. This speaks to the discussions we've had here about how Microsoft will need to cope with reduced revenues as its traditional revenues streams from desktop products dry up over time and its server products move from on-premise sales to hosted subscription services. "With the launch of Windows Azure ... We have real reference accounts and some real success now with Exchange Online, SharePoint Online," Ballmer said. "[We announced] our Office Web application companions. I think we've sketched both a business approach and technology approach that lets us benefit from the cloud."
Compared to pure cloud-based companies like Google, Microsoft has two key advantages. First, it has decades of experience and millions of customers, both of which will help it make the transition to the cloud. (And, in the case of its customers, many will simply follow Microsoft to the cloud.) Secondly, and perhaps most important, Microsoft offers a hybrid strategy that will prove invaluable to Microsoft's most important customers: The enterprise. Unlike Google, which pretty much offers an all-or-nothing cloud approach, Microsoft sells both on-premise and cloud-based solutions. And they work together, so you can mix and match.
"We offer customers choice," Microsoft COO Kevin Turner said at FAM. "Customers don't want 100 percent of every piece of data for every application managed in the cloud. For some users, for some applications, for some competitive reasons or privacy reasons or security reasons, they want to control that and manage it. The company that offers them the ability to have that choice is Microsoft. That's where we have the integrated story with our Business Productivity Online Suite [BPOS] offerings that we launched this past year. And we are already hosting over one million people on email. And it's just going to continue to grow and continue to grow."
Turner also pointed at another factor I think will be important to Microsoft's continued success in the cloud: Its vast partner ecosystem. Google has no formal partner program, certainly nothing like Microsoft's, and it likely never will.
Microsoft's temporary weakness in the cloud, from what I can tell is price. And I think it's a temporary weakness because the obviousness of this issue will cause the company to move aggressively to counter any successes the Google and others like it achieve. Currently, Google offers its BPOS alternative, Google Apps, for free to individuals and educational institutions. Or you can pay a flat fee of $50 per year (about $4.10 per month) for business use. Microsoft's BPOS fees are, as always, all over the map, but the most relevant services work out like so: BPOS is $15 per user per month. Separately, you can get Exchange at $10 per user per month, SharePoint for $7.25, Office Communications for $2.50, and Live Meeting for $4.50.
Notice the hugely important item Microsoft left out here? That's right: Price.
Yes, there's a functional gap between Google Apps and BPOS. But that will close, and as it does, Microsoft will need to lower prices to match Google.
One area in which Microsoft is already moving a lot more aggressively on pricing is Office Web Applications. This incredible online version of Microsoft Word, Excel, PowerPoint, and OneNote will be absolutely free for both consumers and businesses, and enterprises with SA agreements will be able to host it in-house.
Keeping services like this free or low-cost is key to keeping customers in the Microsoft ecosystem. And as we've discussed in the past, this is, I think, the key to Microsoft's future as well: Lower revenues per customer, but thanks to the scale and ubiquity of cloud computing, a bigger potential pool of customers as well. Not coincidentally, this is exactly what Microsoft expects to happen as well: When it rolled out BPOS, I was told that the company expects over half of all Exchange licenses to be for hosted versions by 2012. And fully 70 percent of those customers would be new to the platform.
Microsoft president Bob Muglia touched on this at FAM as well, in the context of Windows Server. "If we go out five or ten years and we assume that the cloud becomes a very substantive part of the server and tools business, what you'll still see is higher overall profitability numbers from Microsoft, higher overall revenue, higher overall profitability," he said. "So we'll continue to grow both key aspects of our business ... As the cloud emerges with Windows Azure, SQL Azure, our overall cloud platform, we have an incredible portfolio that enables our customers to take their existing investments forward into the future."
So is Microsoft f*%&ed? Nope. Not even close.
An edited version of this article appeared in the August 4, 2009 issue of Windows IT Pro UPDATE. --Paul
