Microsoft and the Cloud

We asked the TSIA Executive Advisory Board what issues were top of mind for them as they entered into this year. By far, the impact of cloud computing on the technology services industry is the greatest question mark facing these services executives.   And for good reason. How emerging cloud consumption models will actually impact existing business models in the technology industry is very unclear. Let’s look at Microsoft as an example.

This week, there was a great blog entry on Informationweek by CIO Bob Evans:

      Microsoft: Cloud Computing Will Raise Our Sales, Profit

      Posted by Bob Evans on Feb 17, 2010 07:05 AM

In this entry, Mr. Evans reports how Microsoft sees cloud computing impacting the Microsoft business model:

Microsoft business software president Stephen Elop says the company’s June launch of Office 2010 will include a cloud-based version that will result in more revenue and profit for Microsoft because the company will end up “doing much more work for the customer.”

“In that cloud environment, we are not only selling them software but we are also saying, ‘We’ll take care of your networking, your hardware, your operations, your customer support,’ ” Elop said in an interview. “We’re doing much more work for the customer. What that does is increases revenue and allows us to participate in more profit.”

Mr. Evans, however, is skeptical:

The big challenge for Microsoft in that approach is setting price points based not so much on having its own revenue come out ahead, but rather on allowing customers to lower their cost of infrastructure, which is a top-level priority for CIOs in 2010.

In other words, for Microsoft to gain revenue and profit opportunities, the economic equation for the customer must look like the image below:

Microsoft and Cloud

The Microsoft cloud offering must cost customers less than their current IT environment. There are two key challenges I see for a company like Microsoft as they work to create this economic equation and migrate their business to cloud offerings:

  1. Price Points
  2. Service Capabilities

Price Points

Can Microsoft create a hosted version of their software that generates the same margin dollars as their current software license model? Remember, customers will be expecting lower price points for hosted software—especially when the comparison products are coming from Google.

Service Capabilities

Microsoft believes revenues and profits will increase because the company is doing much for the customer. How much experience does Microsoft have in providing infrastructure as a service? Is the company staffed and skilled to manage IT environments for customers? Building these service capabilities will not occur overnight.

Price points and service capabilities—these will be the sticking points for technology companies as they migrate their business models to cloud based offerings. Technology, in the end, will be the minor hurdle to overcome.


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One Response to “Microsoft and the Cloud”

  1. Tim Matanovich Says:

    Regarding Microsoft “Price Points” and whether they can maintain them despite competition from Google is an interesting question. On the plus side, Microsoft has a lot going for it. Foremost is that it is the solidly entrenched competitor. Quick, everybody who is using Google for Office functionality raise your hand. Did you see any hands go up? Neither did I. Just the thought of changing my Office for a competitor gives me the willies. The big cost to companies in switching from Microsoft is not the software. It is the switching costs, particularly lost productivity during a transition. Next questions: 1)How much lost productivity across your entire business (that is every single department head, VP, admin assistant, analyst, and intern) are you willing to lose to switch to a competitor? 2)How much are you willing to pay Microsoft so you don’t have to face that question? It’s like the QWERTY keyboard. Are there better solutions? Of course, but despite the enormous benefits the switching costs are too high. Or another example, every Apple user will tell you the superiority of their machines and interfaces. Yet how many companies have abandoned the Microsoft standard? Few.

    On the flipside, to unseat Microsoft, Google or any other competitor must demonstrate at least equal benefits (ease of use, capabilities across the user base, software compatibility, templates, downloads, interfaces, etc., etc. ) to Microsoft so that business productivity with these tools will not be lower. Second they must offer a significantly lower price, perhaps a fraction of the Microsoft price, that offsets those enormous switching costs. Then there is the risk premium that customers would demand in order to simply take the risk of switching to something unproven.

    Bottom line, my money is on Microsoft. I think they can demand and get a price premium. I don’t even think it is going to be that hard. Will customers be kicking and screaming? Of course. But if Microsoft did their homework, the economics of the decision is simply on their side.

    Regarding Microsoft’s service capabilities, that is a tougher one for me because it is not my expertise. The only comment I will make is not to confuse the offering with the delivery vehicle. Customers will primarily choose Office functionality based on what I have written in the paragraphs above. Office delivers business productivity. The switch to the cloud is just a new and better way to deliver. I get the same Norton virus protection whether I buy it at Office Depot or download it off the web. When asked to deliver a seminar on pricing via the web, our price is the same as for live delivery excluding travel expenses because the value of the offering is the same. When offering a hosted solution, many companies charge customers for the software independently from the hosting services. Bottom line: distinguish delivery value from offering value.

    Now that I think about it, this might be another advantage that Google or a competitor could bring to the table. Is there value created in the delivery? For example, in manufacturing, just-in-time delivery has created remarkable efficiencies by taking out a load of inventory costs. Walmart, for example, requires timely shipping from its suppliers and carries the bulk of its inventories in its trucks. Many suppliers lost Walmart as a customer because of inability to meet their delivery requirements. So is there a way Google or competitors can lower the costs of their customers in a significant way because they are superior to Microsoft in delivering Office functionality through the cloud? Answering that question in a meaningful way could give them at least some pricing power.

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