From Our NYT Files: Microsoft Emerges as Clear No. 2 in Cloud Computing

From Our NYT Files: Microsoft Emerges as Clear No. 2 in Cloud Computing

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By Steve Lohr
The New York Times

From Our NYT Files: Microsoft Emerges as Clear No. 2 in Cloud Computing


Just a few years ago, Thomas M. Siebel often faced skepticism when encouraging big companies to adopt internet-style cloud computing. Many companies, he said, had qualms about relying on the faraway data centers. Now his customers have a different concern: One cloud service isn’t enough. “They don’t want to be tied to one big tech company,” said Mr. Siebel, chief executive of C3 IoT, a software company that uses cloud computing to analyze data coming from industrial machines. And Mr. Siebel is adapting. After initially working closely with Amazon, a pioneer in cloud computing, C3 IoT now also has a technology and marketing partnership with Microsoft. And it is negotiating a similar agreement with Google. For a few years, it looked like Amazon would run away with the cloud computing business, piling up market share as it has with online shopping. But in the past couple of years, many companies have decided that they don’t want to depend on Amazon alone, and are spreading out their business. That has helped Microsoft most of all. And the software giant has emerged as a strong No. 2 in the cloud market. Microsoft provided further evidence of its rise in the cloud business on Thursday, when it reported its most recent quarterly financial results. Microsoft’s Azure unit, which supplies cloud-based computer processing and storage, and competes most directly with Amazon Web Services, grew by 89 percent over the same period a year ago. The company also reported strong growth in its other cloud offerings.

Microsoft’s profit increased 5 percent to $8.8 billion, or $1.13 a share. That was slightly above analysts’ average forecast of $1.08 a share, as compiled by Thomson Reuters IBES. Revenue rose 17 percent to $30.09 billion in its fiscal fourth quarter that ended in June, higher than the Wall Street consensus estimate of $29.21 billion. The competition to supply the foundation layer of computing and software — the cloud-era equivalent of an operating system — is heated and costly. The biggest players, analysts estimate, are spending up to $10 billion a year on their global networks of data centers. This core cloud business is a $60 billion-a-year market, which grew by 50 percent in the first quarter of this year, according to Synergy Research Group. In that fast-growing market, Amazon holds a 33 percent share, unchanged since the end of 2015. Over the same span, Microsoft’s share climbed from 7 percent to 13 percent, and Google’s doubled to 6 percent. John Dinsdale, chief analyst at Synergy Research, predicted that the cloud giants will get bigger and capture a steadily rising share of corporate technology spending — especially as they add new capabilities, like machine learning and artificial intelligence, to their services. “The information technology market is going to increasingly gravitate towards a small number of hyperscale cloud providers,” Mr. Dinsdale said.

In a recent research report on that market, Gartner identified three top-tier companies — Amazon, Microsoft and Google. And it listed only three others, Alibaba, Oracle and IBM, as their competitors. “It’s a two-horse race between Amazon and Microsoft at this stage,” said Raj Bala, a Gartner analyst. “Google is making headway, nipping at their heels, but it’s still behind the leaders.” For Amazon and Google, cloud-computing services were a natural outgrowth of their original businesses — e-commerce for Amazon and search for Google. Both companies were born on the internet. Not so for Microsoft, which has made the most striking transition to the cloud. Its heritage, corporate wealth and industry dominance was based on selling packaged software and its Windows operating system for personal computers. Microsoft’s later forays into new markets were typically late and hobbled by the company’s Windows fixation. Its failed mobile operating system, for example, was widely criticized as a kludgy attempt to shoehorn Windows onto a smartphone. The company’s path to cloud computing was lengthy and sometimes halting, even if the technical roots stretch back many years. Its MSN online service and Internet Explorer browser had their heydays in the 1990s. More recently, the company poured resources into its Bing search engine.

In late 2005, Ray Ozzie, Microsoft’s chief technical officer, wrote a lengthy memo, “The Internet Services Disruption,” laying out the challenge and opportunity ahead for the company. In 2008, two years after Amazon entered the cloud market, a team of the Microsoft’s brightest scientists set to work on a cloud project, code-named Red Dog. In 2010, Microsoft introduced its cloud service, but it did not have an offering comparable to Amazon’s until 2013, analysts say. Before he became Microsoft’s chief executive in 2014, Satya Nadella held senior roles in its cloud, online services and search businesses. Once he took over, Mr. Nadella accelerated investment in the cloud unit and focused Microsoft’s sales teams on the business, analysts say. Unlike his predecessor, Steven A. Ballmer, Mr. Nadella’s career was not steeped in Windows and the business model of packaged software. The traditional software business relied on product licenses with hefty payments up front rather than the pay-for-use subscriptions of the cloud world. “Technology was not really the obstacle for Microsoft, the problem was the business model,” said Michael A. Cusumano, a professor at the Massachusetts Institute of Technology’s Sloan School of Management. “Nadella has changed the strategy and the culture.”

Amazon holds some formidable advantages in the cloud market. It has the most customers — some spending more than $100 million a year — and more than 2,000 consulting partners to help companies use increasing amounts of Amazon cloud services. Many corporate technology managers see Amazon as the safe choice. But Microsoft has the advantage of being mainly a supplier of technology to businesses, unlike Amazon and Google. Its longstanding relationships with corporate customers, analysts say, are helping Microsoft gain ground as mainstream companies increasingly move to cloud technology. Microsoft has recently announced cloud deals with companies including Walmart, General Electric, Bayer, Starbucks and Campbell Soup. Microsoft’s offerings have steadily improved, but even Mark Russinovich, chief technology officer for Azure, pointed to the company’s roots in business as a driving force. “The relationships we have with companies, understanding their needs, is really helping with these migrations to our cloud,” Mr. Russinovich said.