Directions

Cloud Strategies: Yours and Microsoft's

• By Paul DeGroot
• October 01, 2010

Microsoft's determination to dominate the market for online services has never been as evident as it was at the 2010 Worldwide Partner Conference (WPC). Why is it moving so aggressively into that space?

Competition? The competition is small and fractured. Money? What money?

Subscription licenses for the Business Productivity Online Suite (BPOS) cost $120 a year max, or $360 for three years. I estimate that buying equivalent licenses for conventional, on-premises servers and server access licenses for the same period of time would generate more than twice as much revenue for Microsoft, most of it pure profit.

With online services, in contrast, subscription licenses must pay for hardware, power, cooling, real estate, management personnel and massive network bandwidth. Microsoft loses the revenue for the server software itself, given server costs are built into the services subscription. And, because of the competition, Microsoft will have little room to raise prices in the future to recover costs.

So this doesn't appear to be a competitive play, and it's not about the money. If you're a partner, this is worrisome, because if you're planning to follow Microsoft "all in" the cloud, you need to understand what Microsoft sees there. If you can't identify, with some precision, the products and services Redmond will offer, you risk a collision with the giant. If you can't identify the long-term strategy, where do you invest in application development or technical capabilities? Who do you hire? How do you position your own company to help Microsoft, and thus yourself, succeed?

So what is the strategy, Mr. Genius Analyst? Rather than beat around the bush, I'll confess that I don't know. But I don't know if Microsoft really has a long-term business strategy here. You wouldn't know that from all the talk at the WPC, but believe me, I was listening for something that looked like a long-term business strategy and I didn't see it.

Instead, this looks like what we at Directions on Microsoft call a "prevent" strategy, something that Microsoft has employed with mixed success in the past. To prevent the Netscape browser, AOL Internet service and VMware ESX (among many other examples) from dominating, Microsoft introduces a competing product that may not be better, but is cheaper or even free.

What makes this strategy a mixed success is that, while often succeeding from a competitive perspective, it often fails as a stand-alone business. Yes, Internet Explorer beat Netscape -- with billions in legal fees and development expenses, and no revenue. MSN kept AOL at bay, but Microsoft has lost about $8 billion so far on online services. Hyper-V is doing fine against ESX, as long as you don't count the money.

Microsoft's cloud strategy looks like a prevent strategy, and Redmond wants to make sure that partners are all in with it. But here's the risk: Microsoft wants to convince you to be its cloud partner to prevent you from being someone else's partner.

Let me add an important caveat: I don't fault Microsoft for its cloud initiative. Microsoft understands the importance of market share better than most, and market share in hosted services will be critical 10 years from now. As broadband accelerates in speed and availability and HTML5 and other technologies deliver richer applications, customers have less reason than ever to sink precious capital and human resources into on-premises software.

What Microsoft sees is one business, the fat client that generates hefty revenues from accessing back-end servers, in decline, and another -- thin or legacy clients that require only a browser or other lightweight, OS-agnostic (and free) software to access online services and applications, on a sharp increase.

So while Microsoft may not have a detailed strategy right now, it knows what the future looks like. I know that many of you can see that future with equal clarity. Some of you will come up with a profitable business strategy before Microsoft does.

Next Time: Knocking out the Middleman