Margins Just Not There for Microsoft in Cloud?

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Every time Microsoft makes any kind of a product announcement, it's news, but especially when it involves anything that takes the company out of its client computing comfort zone. So not surprisingly, folks have been following Microsoft's introduction of its Azure cloud computing platform with special interest. Several IT Business Edge bloggers chose to write about it this week.


As IT Business Edge's Kachina Dunn notes in her post, Microsoft's Ray Ozzie gave Amazon props for its Elastic Compute Cloud (EC2), before he described how Microsoft would advance the cloud computing concept in support of what it calls a software-plus-services strategy.


IT Business Edge's Dennis Byron, among others, knocks Microsoft for its effort to combine software and services rather than moving toward a full-fledged service mentality. He writes:

I suggest that IT folks not get caught in the trap that software and services can be combined in that way. You should look for suppliers that do one or the other, but be wary of those that claim they do both together in some mind meld. Microsoft is not the only one making this claim.

But Microsoft and other more traditional software companies may struggle with an even more fundamental issue as they move to supplement their standard offerings with software-as-a-service and cloud development platforms.


Ozzie hinted at it with his acknowledgment of Amazon's success to date. Sridhar Vembu, CEO of AdventNet, the company that created the Zoho suite of online productivity applications, highlights it in a smart blog post.


Amazon is a giant in a business with notoriously slim profit margins, which is likely part of the reason it was so quick to recognize and capitalize on the cloud computing opportunity. Its retail business models are designed around obtaining the maximum amount of efficiency from its operations.


That's not the case with traditional software suppliers. Companies like Microsoft aren't particularly eager to make huge infrastructure investments to support what could end up being a low-margin business -- especially when at least some of its customers will likely be those who migrate from its own higher-margin on-premise products. Writes Vembu:

... it is hard to see how the economics would work for [Microsoft] against Amazon. It is very hard for companies to go down the value chain for growth, so I am skeptical Microsoft would easily accept Amazon-like margins. On the other hand, for Amazon, cloud services have to deliver only a little higher margin than retail to be well worth the investment. That is not a tough hurdle, because retail is one of the toughest businesses out there.

Maybe that's why, as I wrote earlier this year, Amazon is becoming quite the Web services wonder, leaving software giants like Microsoft in the unaccustomed position of playing catch-up.


As a retailer, Amazon's business is strongly based on customer satisfaction, which may be why it beat cloud competitors like Google to the punch in offering such customer-friendly features as strong service-level agreements and tiered pricing structures.