News

Microsoft Sees Its Cloud Business Hitting $20 Billion by 2018

• By Kurt Mackie
• April 30, 2015

Microsoft on Wednesday made a financial case for shifting its business to the cloud.

Speaking the 2015 Microsoft Financial Analyst Briefing hosted at the Build conference in San Francisco, Microsoft CEO Satya Nadella said that Microsoft expects to hit to a "$20 billion" revenue target for its cloud services by 2018. This follows another ambitious goal announced by Microsoft at Build: bringing Windows 10 to 1 billion devices.

Nadella told financial analysts that the $20 billion figure is an annual "run rate," meaning an extrapolation from Microsoft's current cloud computing earnings.

"So we have an ambition to get to $20 billion of annualized run rate in the cloud in FY18," Nadella said. "So that's our target, and that's what we're going to pursue with the strategy I just laid out. And this, by the way, is about really the combination of what we today have in Office 365, Dynamics, EMS [Enterprise Mobility Suite], Azure."

The Enterprise Mobility Suite is Microsoft's bundle of services consisting of Azure Active Directory Premium, Windows Intune and Azure Rights Management Services, as announced last year. Microsoft's plan is make its services "sticky" with its customers through the Azure Active Directory identity and access management service, which enforces trust for mobile device access. The Enterprise Mobility Suite is how Microsoft plans to sell Azure Active Directory services to its business customers.

"What do you call Azure Active Directory?" Nadella said. "Azure Active Directory powers everything. EMS is fundamentally a function of what we have in Azure Active Directory."

Monetization via Services
Microsoft's strategy, Nadella said, "is to be a productivity and a platform company in this mobile-first, cloud-first world." Microsoft plans to monetize Windows via its cloud services. It is building an "intelligent" backend with its cloud services to support applications, and apps will become intelligent because of data. He pointed to Bing search as a way of monetizing Windows, claiming a 20 percent search share in the U.S. market. Nadella also pointed to the Windows Store as something new for Microsoft to generate revenue.

Amy Hood, Microsoft's chief financial officer, offered an explanation during the Analyst Briefing event about why making Windows 10 a free upgrade for many Windows users will add to this revenue model.

"When we talk about why we're upgrading the Windows 10 install base, why is that upgrade free?" she said. "Why is it important to get to a modern environment? And why, when you look at the Windows interface this morning, did you see search built into the experience? You saw gaming built into the experience. You saw a unified store. These are all new monetization opportunities once a PC is sold."

Shift to Subscription Model
Microsoft plans to steer its customers away from making one-time purchases every five to seven years, which is its old model. Instead, it plans to move customers more toward annual or monthly payments via a subscription model. Microsoft will have the subscription model, alongside its multi-year and one-time purchase models, though, for its business customers, Nadella added. The aim is to monetize the customer over a lifetime.

"The actual transformation itself from an economic standpoint … is about moving from what I would say is a transactional relationship that we've had with many of our customers both on the consumer side and as well on the organizational side to more of a lifetime value," Nadella explained.

With Office 365 services, Microsoft aims to gain more small business customers. They will have access to more sophisticated technologies, such as SharePoint Online and Skype for Business, that previously weren't so accessible, Nadella explained.

Nadella played down competition with other cloud service providers such as Amazon Web Services. In response to an analyst question, he claimed that Azure had been opened up. It supports a variety of apps and platforms, including Linux.

"I mean one out of five VMs is a Linux VM," Nadella said. "We definitely have to get more distributions supported, that's something that we are actively working on. But there's Java first-class form Oracle on Azure. We have all of the workloads from IBM on Azure certified. We have SAP. We have a very comprehensive set of third-party technology. We have a bunch of -- I talked about IBM. We have Docker. We have now Linux containers, Docker containers on Azure. We have basically third-party systems from Cloudera to data stacks that are available on Azure."

Numbers Game
Plenty of numbers were dropped for the number-crunching crowd. They came from Hood, Nadella and Kevin Turner, Microsoft's chief operating officer. Here's a sampling:

• "Windows is about a $15 billion business in FY15." (Hood)
• "Moving an existing EA [Enterprise Agreement] customer to the cloud...results in a 1.4 time increase in the lifetime value of that same customer." (Hood)
• "Today, we have 15 million monthly active [commercial] users of Office 365." (Nadella)
• There are "7 million paid seats of Dynamics." (Nadella)
• There are "5 million organizations that are part of Active Directory or Azure AD." (Nadella)
• There are "1.4 million SQL database on Azure." (Nadella)
• There are "3 million developers using Visual Studio Online." (Nadella)
• There were "13,000 enterprise customers within the first year of Enterprise Mobility Suite." (Nadella)
• "Office 365 commercial seats are up 84 percent year-on-year." (Turner)
• "We have 65,000 Office 365 partners now worldwide." (Turner)
• "Over 50 percent of our Enterprise Agreements signed during the quarter include cloud services." (Turner)
• "Our commercial cloud revenue grew 106 percent year-on-year for the seventh consecutive quarter of triple-digit growth." (Turner)
• "Eighty-two percent of our commercial revenue this past year -- or quarter -- came from annuity revenue streams." (Turner)

Microsoft's shift toward services also was apparent in its recently reported fiscal Q3 earnings results. Those results seemed to have largely pleased financial analysts, despite the soft PC market that has eaten into Microsoft's traditional Windows revenue.