In-Depth

Bet on Microsoft's Cloudy Forecast

Redmond's massive investment in forward-thinking cloud infrastructure is spreading across the globe, indicating that Microsoft will be worth partnering with for years to come.

• By Scott Bekker
• November 01, 2010

Microsoft is often accused of letting marketing claims get ahead of a product's actual capabilities. Despite worries about hype when it comes to cloud computing, the cloud is an area where Microsoft's reality vastly outstrips its marketing. When it comes to choosing a strategic vendor partner for a cloud computing future, Microsoft is making the investments that make it well worth a look.

Partners can be excused for not understanding the extent of Microsoft's investment in the cloud -- after all, many of Microsoft's 88,500 employees don't understand it yet either. That was evident at the Microsoft Worldwide Partner Conference (WPC) in Washington, D.C., in July. Despite the unrelenting corporate emphasis on cloud at the show, many Microsoft employees didn't understand much about the company's cloud strategy beyond a few buzzwords.

Even they can be excused. The Ray Ozzie memo in October 2005 on the "Internet Services Disruption" generated a lot of buzz at the time. But since then, the internal noise of development and launch machinery required to ship massive releases like the troubled Windows Vista, Microsoft Office 2007, Windows 7 and Office 2010 has drowned out the quieter calls to the cloud.

By the time that Steve Ballmer gave his "we're all in" speech in March of this year, it was a renewed wake-up call even for a lot of people within Microsoft.

Ballmer continues to reinforce the cloud message, and confirms that Microsoft needs to keep explaining it, and start explaining it better.

"We talk a lot in our business about the cloud -- cloud, cloud, cloud, cloud, cloud," Ballmer said in a speech in Sweden in October. "What is the cloud? I gave a speech in May. We had about 100 CEOs and maybe a handful of journalists in an audience at our headquarters in Seattle. And I got up there and I did what I thought was my very best work describing the cloud.

"And then everybody sat very politely and quietly afterward, and finally one of the journalists raises her hand, and she said, 'Steve, I understand you've got a lot of enthusiasm for the cloud.' 'Absolutely I do,' I said, and I said, 'What's your question?' She said, 'I still don't really understand what it is.'"

Part of the problem was that the guy inside Microsoft who understood the cloud best didn't communicate often, either to employees or to the outside world. Ozzie was the chief software architect, the man behind the curtain when it came to Microsoft's cloud computing initiatives. Microsoft Chairman Bill Gates and Ballmer brought him aboard (by buying his company, Groove Networks) to help Microsoft make the transition to the 21st century. Known for being more comfortable in front of small groups, Ozzie won't be evangelizing Microsoft's cloud strategy in public in the future, either. In a public e-mail to employees, Ballmer announced Oct. 18 that Ozzie was stepping down from his chief software architect role to focus more broadly on entertainment initiatives until he retires at an unspecified date.

Impressive Array of Offerings
Over the last few years, under various labels from Software plus Services to Software as a Service (SaaS) to Online Services to Cloud Computing, Microsoft has come out with a lengthy list of offerings.

They are (briefly):

• Windows Azure: the scalable environment with compute, storage, hosting and management capabilities that links to on-premises applications with secure connectivity, messaging and identity management. Essentially a distributed server OS in the cloud, akin to high-performance computing.
• SQL Azure: a relational database in the cloud.
• Windows Azure AppFabric: for connecting applications and services in the cloud or on-premises.
• Windows Azure Platform Appliance: the "cloud in a box" set of about 900 servers plus storage and networking gear running Windows Azure that customers can buy in shipping containers and keep on-premises.
• Microsoft Codename "Dallas": the code name for a new service described by Microsoft as an information marketplace "allowing developers and information workers to easily discover, purchase and manage premium data subscriptions in the Windows Azure platform."
• Dynamics CRM Online: the cloud version of the Dynamics CRM application and one of Microsoft's oldest online services.
• Business Productivity Online Suite (BPOS): the Microsoft-hosted bundle of e-mail, collaboration, security and communication tools priced per seat and per month. Customers can order some of the services on a stand-alone basis, such as Microsoft Exchange Online and Microsoft SharePoint Online.
• Windows Intune: a cloud version of desktop management tools aimed at midsize businesses and managed services providers.

Additionally, Microsoft offers a number of other cloud-based services that complement on-premises products.

While most of the heat and light in the partner community around online services has focused on BPOS, which is easy to understand and explain, fairly straightforward to integrate into a business and easy to calculate how the margins translate to partner revenue opportunities, the Windows Azure lineup is the most potentially transformative.

Ozzie worked with a fairly small team inside Microsoft to develop Windows Azure ahead of its launch earlier this year. When the program was known by its code name of "Red Dog" in 2008, Ozzie had a team of about 150 people working on it, according to a lengthy profile in Wired magazine. While small, the team featured such Microsoft heavyweights as Amitabh Srivastava, formerly of Microsoft Research, and Dave Cutler, who led development on Windows NT and came out of semi-retirement to work on Windows Azure. The team built a 1,000-server test array in the Redmond offices and siphoned electricity from other offices to power it.

The image of a shoestring, start-up team is useful for developers and partners in imagining how they can use a relatively low level of investment to start creating new applications and services of their own. But it also creates a false sense of the amount of priority the project had within Microsoft.

The dedication of 1,000 servers as a test bed was only a tiny down payment toward the infrastructure that would eventually be required to support Microsoft's cloud ambitions. Such test beds used to be one of the biggest infrastructural requirements for Microsoft -- putting Windows or SQL Server through its paces on thousands of different machine configurations. As Microsoft pivots to becoming a cloud provider, the post-release infrastructure is the big expense, as Microsoft must be ready to absorb whatever workload customers and partners put on a product.

To understand Microsoft's investment in cloud computing requires a look at the infrastructure the company is building out.

Ballmer laid out some of the specifics behind those investments in his Stockholm speech last month. "You know, our company, we've built these incredible datacenters so that we can run our cloud services. Just this last year we completed a new $500 million datacenter complex in Dublin, from which we will provide high-quality support to our customers throughout Western Europe. But it's a big investment, there's big things happening, and it creates new opportunities for all of us," Ballmer told the audience of customers and partners.

The half-a-billion-dollar project in Ireland isn't the only one. Microsoft has invested in datacenters costing roughly $500 million each in Chicago; Quincy, Wash.; and San Antonio, Texas. The build-out continues. In late August, officials in Virginia announced that they had beaten out North Carolina and Texas for a $500 million Microsoft datacenter near the southern Virginia town of Boydton. As Microsoft continues to site and build facilities, and to develop the container capabilities introduced in the Chicago datacenter and other technological advances, the company hopes its price per datacenter will come down to about $250 million.

At the same time, the Windows Azure Appliance takes on a strategic aspect for Microsoft's market reach. While Microsoft plans and builds facilities worldwide, datacenters won't be in every country -- a fact that limits the appeal of Windows Azure for organizations needing locally stored data to meet legal requirements or organizational policies. But the Windows Azure Appliance, with its ability to store data locally while regularly receiving updates to run the same versions of Windows Azure infrastructure software as Microsoft datacenters, could potentially expand the platform.

In a 2009 discussion with Steven Levy of Wired magazine at the Churchill Club in Palo Alto, Calif., Levy asked Ozzie how many companies can build the kinds of datacenters that Microsoft and Google Inc. build.

"Not too many," Ozzie said, as reported by CNET. "I don't know about Amazon," he added, referring to the most established cloud provider today. "They are the leader. They have done amazing work, but the level to which you need [to invest] to build it out ... it's very substantial."

A Partner Investment
One source of frustration among Microsoft partner companies during the recession of the last few years was that Microsoft seemed to be cutting back on market development funds and other direct investments in partners, even as the company sat on a massive pile of cash.

But the datacenter build-out that started in 2007 and continued unabated through today can be viewed through another lens as a partner investment -- with the partners being some of Microsoft's strategic hardware partners in servers, storage and networking gear.

Over the last three years, Microsoft has been building out datacenters well ahead of expected demand -- at a time when revenues and profits have been falling. How big a deal have these datacenter build-outs been for Microsoft's preferred hardware providers like Dell Inc. or Hewlett-Packard Co.?

In an interview at the WPC, Andy Rhodes, marketing director of the Datacenter Solutions Division at Dell said that if Dell's custom-built server division were separated out from the rest of Dell as its own company, the division would have ranked third in server sales for the most recent quarter of the year. While he wouldn't say how much of that business comes from Microsoft, Dell's custom server business has been rapidly ramping up from zero a few years ago.

The numbers of servers involved in each datacenter is in the hundreds of thousands, according to another partner, who asked not to be identified to protect his ongoing work with Microsoft. None of this is to say that the investment in hardware partners is charity on Microsoft's part or some sort of effort to help partners through a rough economic patch. The investment comes purely as an all-out effort by Microsoft to position itself to compete for the explosive growth it expects from cloud-based services.

Broader Partner Evangelism
Now that a lot of that build-out has happened, Microsoft is beginning to ramp-up efforts to bring non-OEM partners up to speed on the capabilities of Windows Azure. In September, Microsoft launched a program in the United States called Windows Azure Free Pass. "What that does is that gives developers in the U.S. the opportunity to try out Azure for a 30-day period," says Josh Waldo, director of solution partner marketing, Microsoft U.S. SMB, customer and solution partner marketing organization. "It provides them access to the Azure platform, to try it out in a sandbox environment and see if Azure is the right platform for them."

In early October, the company rolled out another partner-focused program called the Windows Azure Platform University for Partners. A series of in-person events running through early December, the university has tracks for ISVs and systems integrators (SIs).

For ISVs, the program involves key scenarios in which the Windows Azure platform can help augment current business and basic training on the technical underpinnings of SaaS on Windows Azure. For SIs, the university is designed to provide tools for building a Windows Azure practice with tips on helping enterprise customers evaluate the cloud, understanding staffing models for migration practices and getting details on partner revenue opportunities. Systems integrators also get training on providing cloud assessments.

No Guarantees
There are no guarantees that Microsoft will succeed in the cloud. The first risk, and one that many critics presume Microsoft will stumble into, is to take the wrong steps in the cloud. Microsoft has come under heavy criticism among partners for the way it has rolled out pricing and billing for BPOS, for example. With the creation of any new industry, there's a lot of fumbling in the dark, and it's frighteningly unclear which missteps might prove fatal.

Another possibility is that adoption doesn't ramp-up. There are plenty of observers who say that the cloud is overhyped, and the reality can't ever match up to the buzz.

Ballmer, for one, doesn't think that's a likely scenario. "We've had good success in bringing customers with us to the cloud. Fifty percent of the Fortune 500 customers in the U.S. are now using one of the Microsoft cloud services. The bulk of those customers would be using what we call our Business Productivity Services: Exchange Online, SharePoint Online, Office Online. But we have over 10,000 paying customers for the platform, Windows and SQL Azure," he said in Sweden.

Microsoft's Windows Azure customer base is a significant figure for any company, but Microsoft is a company that boasts of 1 billion Windows users, so there's room to grow. That brings up a related, and more likely, concern -- that the cloud will catch on, but it's Google or someone else that benefits.

Many of the reasons to believe that Microsoft will succeed in the cloud also apply to Google. The Mountain View, Calif.-based company is creating many innovative cloud services and aggressively investing in new datacenters, although Google is much more secretive than Microsoft about its facilities, so it's hard to directly compare what the companies are doing with their infrastructures. While Microsoft partners will be evaluating Google's offerings closely, Microsoft's history of working with partners and the applicability of Microsoft .NET Framework skills to the Windows Azure platform will make Microsoft the default choice for many.

Another risk is that Microsoft changes direction -- although this is a concern that's more based on a passing acquaintance with Microsoft's moves in this space. As the service launches and datacenter investments of the last few years show, Microsoft's declaration earlier this year that "we're all in" on the cloud is hardly a sudden change.

Ballmer strove to allay concerns that an Ozzie-less Microsoft would lose its way on the cloud in his e-mail about Ozzie's new role: "Our progress in services and the cloud [is] now full speed ahead in all aspects of our business." Ballmer went on to list the ways that Ozzie had helped propel Microsoft to a cloudy future: "As a company, we've accomplished much in the past five years as we look at the cloud and services. Windows Live now serves as a natural Web-based services complement to both Windows and Office. SharePoint and Exchange have now decidedly embraced the cloud. And by conceiving, incubating and shepherding Windows Azure, Ray helped ensure we have a tremendously rich platform foundation that will enable app-level innovation across the company and by customers for years to come."

Early Days
"In the grand scheme of things, these really are the early days. There's so much potential if we bring our ideas forth, and do rapid innovation on this platform," Ozzie said last November at the Microsoft Professional Developers Conference (PDC) in Los Angeles. "Let's dream and then let's build. The possibilities for your impact, for our impact together, really have no bounds."

Windows Azure, especially, provides a rare opportunity for Microsoft partners to think big. Many of the changes in the Microsoft Partner Network are about assigning partners to specific areas, where they can provide solutions for a set of customers that correspond to a specific point where a particular vertical industry, horizontal skill and geographic area meet. Windows Azure, however, allows partners to use their Microsoft expertise to dream beyond the Microsoft platform and reach for the brass ring.

There will be plenty of opportunities for partners to provide the usual discrete mix of vertical, horizontal and geographic capabilities on Windows Azure. But dreaming on Windows Azure can take partners beyond the marketing of the Microsoft platform. The only technical constraint is the capacity of Microsoft's multiple $500-million datacenters. Create the right application, and customers may not care what's on the back-end.

Whether partners think large or small with cloud computing, Microsoft is asking them to consider Windows Azure. As Ozzie said to the PDC crowd, "When thinking of the cloud, bet on our online services and bet on Windows Azure."

That sounds like a high-percentage bet for Microsoft partners, too.