Microsoft, which not too long ago was facing irrelevance, is successfully riding the cloud to reestablish itself and brighten it prospects.
A deep dive into the company by MTN Consulting — one of eight “Webscale Playbook” company assessments — finds that Microsoft has made great progress reorienting itself around Azure and subscription services. The company also has diversified and is plowing money, research, and development into artificial intelligence (AI), quantum computing, and networking, the report says.
The current dynamic is shaped by Azure. The company has 54 Azure cloud regions, more than 130 edge node locations, and adds more than 120,000 subscriptions each month. Microsoft interconnects all these pieces — and serves up Xbox Live and other online services — via 70,000 miles of fiber and submarine cable systems.
The breakdown of revenue for Microsoft provides good insight. The company generated $110.4 billion in its fiscal 2018, which ended June 30. Only two categories were responsible for double digit portions of revenue: cloud at 22 percent and “others” at 58 percent.
The discordant statistic — that almost 60 cents of every dollar generated is “other” — seems to be due to both how MTN Consulting looks at things and that Microsoft’s transition is very much a work in progress.
The playbooks assess companies’ webscale initiatives, so business units and products that don’t fit that broad definition are lumped into the “other” category. “For Microsoft, the ratio for ‘others’ is especially high,” said MTN Consulting Lead Analyst Arun Menon, who wrote the report. “It includes Windows, Server products, Office products (other than cloud-based Office 365), LinkedIn, and other enterprise products.”
Slowing Azure Growth Not a Bad Thing
Azure’s somewhat slowing growth rate is a function of its expanding size — and it isn’t a concern to Menon. Azure grew at a year-over-year pace of 76 percent during the fourth fiscal quarter, which Menon labeled as impressive. There has been commentary that Azure growth is slowing, but Menon thinks the issue is statistical. “This pace of growth has dropped a little this quarter, given that it is difficult to keep on growing at nearly triple-digit rates with the business now reaching massive scale compared to a few quarters ago.”
Future growth will be fed by continued investment. Microsoft is adding 10 Azure regions in the Middle East and Europe. This includes one each in Dubai and Abu Dhabi, and two in Switzerland, Germany, and Norway. That, according to MTN Consulting, will drive “capital intensity” to about 12 percent, which is in the telecom industry neighborhood of about 15 percent.
It’s interesting that two of the biggest names of an earlier era in telecom and IT — BlackBerry is the other — made the difficult decisions that enabled them to live to see another fiscal day. Microsoft is the more dramatic survivor since BlackBerry now is a niche player.
The future is bright, according to Menon. “Microsoft’s cloud business has plenty of room to accelerate with its global cloud expansion strategy and growing migration of enterprise workloads to cloud,” he wrote in an email. “Competition will continue to grow in the cloud segment, though, as Chinese providers expand in Asia and Europe, and the Google Cloud Platform continues its growth.”
The company’s research and development efforts, the Playbook says, focus on AI, quantum computing, productivity tools, streaming cloud-based gaming, and networking. “Scaling the cloud requires not only more data centers, but also faster intra- and inter-data center connectivity links,” Menon wrote. “For instance, Microsoft is very active with the OIF in pushing 400ZR, a 400 Gbps link specification for data center interconnect.”