A Close Look At Microsoft’s Azure Cloud, Part 1: Cloud Computing

Microsoft (NASDAQ:MSFT) launched its cloud platform, Azure, in 2010. Since the launch, the service has posted triple-digit growth, and in the last fiscal year the platform reported a growth rate of 102%. Considering the latest quarterly results, in which the company claimed that its intelligent cloud revenue grew a 5.6% year over year, we estimate that the annual revenue run rate for Azure can be close to $2.5 billion. ^[1] Azure, currently, is the only major cloud platform that is consistently ranked as a leader for infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS) and software-as-a-service (SaaS). ^[2] While Microsoft continues to use the same platform that is used in Azure for some of its offerings (such as X-box live, Bing, Office 365, SQL etc.), it is extensively marketing its cloud offering to enterprises to roll out their services and applications on its platform. This is a two part article. In the first part, we will explore the cloud computing industry. In the second part we explore why clients are likely to flock to Azure as their go-to platform, suggesting there is a revenue opportunity for Microsoft.

See our complete analysis of Microsoft here

The Cloud Market

Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction. ^[3]

The cloud computing pile consist of three services namely software as a service (SaaS),  platform as a service (PaaS), and infrastructure as a service (IaaS). The three services in the cloud stack (i.e. SaaS, PaaS and IaaS)  are interconnected and dependent on each other to deliver a cost-effective solution to clients. Most  Cloud services are provided on a “multitenancy” basis where users in various locations access an architecture comprised of computing resources situated variously at an enterprise data center (a so-called private cloud) or at a data center of a webservices providers (i.e., Amazon Web Services, to list just one).  This latter alternative is the so-called Public Cloud.  Key here is the aggregaton of computing resources that are remote from users. Each of the services can either be availed independently or in conjunction.  A brief description of each service is as follows:

• Software as a Service (SaaS) is software that is deployed over the internet. With SaaS, a software company licenses an application to customers either as a service on demand, through a subscription “pay-as-you-go” model, or at no charge when there is an opportunity to generate revenue from streams other than the user such as from advertisement. An obvious example of SaaS is Microsoft’s Office 365, where the applications run remotely from the user’s computer.  Another model that is coming to fore is the hybrid “freemium” model which gives free access to the basic functionality of the software, but the user has to pay a subscription fee for using advanced functions.
• Infrastructure as a Service (IaaS) is a way of delivering Cloud Computing infrastructure – servers, storage, network and operating systems – as an on-demand service via secure IP-based connectivity. Rather than purchasing servers, software,data centerr space or network equipment, clients instead buy those resources as a fully outsourced service on demand. IaaS is often based on virtualization techniques, i.e., creating a virtual computer that is independent of the actual hardware on which it exists, which may indeed be smaller or larger than its virtualized counterpart. ^[4] An example of IaaS would be a Microsoft SQL Database implementation that is sourced remotely from an enterprises own infrastructure.  In this case, the data and the analytics exist as a virtualized implementation that utilizes the service provider’s servers.  Compared to SaaS and PaaS, IaaS users are responsible for managing more: applications, data, runtime, middleware, and the O/S.
• Platform as A Service (PaaS ) is the most complex of the three stacks. PaaS can be defined as a computing platform that allows the creation of web applications or software quickly and easily and without the complexity of buying and maintaining the software and infrastructure underneath it. We can extend our analogies above for Office 365 SaaS and SQL IaaS implementations, by adding development tools, etc., that allow enterprise administrators to customize analytics and applications on the remote, virtualized machines. PaaS is similar to SaaS except that, rather than being software delivered over the web, it is a platform for the creation of software, delivered over the web

Growth In Cloud Services Across PaaS And IaaS Market

Over the past few years, cloud services have come to fore for both large and SME (small and medium size enterprise) companies that are looking to improve their businesses by employing IT solutions and services. The advantage of cloud services is the scalability and accessibility to new applications, resources and services. Furthermore, the costs associated with using these services are less as the onus of management of these services lie with the cloud services provider. As a result, demand is growing for virtualization services, which enable a service provider to create a virtual computer domain independent of the underlying software and hardware that not only increases manageability but also reduces cost. As a result, cloud services are expected to reach a market size of $204 billion in 2016 from $175 billion in 2015 at a growth of 16.5%, according to Gartner Research. ^[5]

Within the public cloud services, IaaS is expected to grow from about $16.2 billion in 2015 to $22.4 billion in 2016. Considering the size and growth of cloud services, companies such as Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), IBM (NYSE:IBM) and Google (NASDAQ:GOOG) are rolling out new services, and extending functionality in this domain.

In the next note, we will explore Microsoft’s Azure cloud services.

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1. Earnings Transcript for Q4 2016, July 19 2016 [↩]
2. Follow an industry leader to the cloud [↩]
3. NIST Cloud Computing Program, www.nist.gov [↩]
4. Virtualization, www.wikipedia.org [↩]
5. Gartner Says Worldwide Public Cloud Services Market Is Forecast to Reach $204 Billion in 2016, January 25 2016, www.gartner.com [↩]