A Close Look At Microsoft’s Azure Cloud, Part 2: The Offering

In our previous article (the first in a two part series), we looked at some of the trends in cloud computing. To recap, cloud computing is expected to grow at a robust pace in 2016. The primary driver for this growth are the cost benefits of outsourcing the hard- and software required for technology based services, which in turn depends on the state of global economy. Cloud-based services comprise Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service and all three are projected to experience healthy demand. Microsoft (NYSE:MSFT) currently provides services for two of the three segments (IaaS and PaaS) through its Azure offering. And it offers the third (SaaS) separately on Azure via applications such as Office 365, X-box Live, Bing, etc. In this article, we will look at Azure platform from Microsoft.

 See our complete analysis of Microsoft here

Azure Cloud Services

Microsoft launched its Azure platform in 2010, and since then it has posted triple digit growth. Microsoft is pricing different services offered through Azure at different price points, depending on the services and resources rendered. Azure services are built out on the public, private, or hybrid cloud, and some of the services are available under different cloud umbrellas are, as follows:

• Infrastructure Services: – Azure provides different machine virtualization services that run both Windows and Linux operating systems. Furthermore, it provides cloud storage solutions through StorSimple and Storage.  And the Azure Virtual Network extends the on-premise network through site-to-site VPNs (Virtual Private Networks).  The company uses a pay-as-you-go model for pricing its IaaS services through which a client only pays according to the usage of services. While this service can cost as llittle as $13 per month at the basic tier, the cost can increase to $3,646 for  high end solutions that incorporate high-performance clusters, modeling and simulation, video encoding, and other compute or network intensive services. ^[1]
• Platform services: – The Azure platform provides the ability to build and deploy a wide variety of modern applications for Android, iOS, and Windows that all take advantage of the cloud.  These include web, mobile, media and line-of-business solutions. Azure cloud services handle all the tedious Operating System details, so that the development team can focus on building applications for its users. A development team can either use the PaaS service for building and deploying full scale applications or developing simple websites that do not require more complex configurations for scaling and data processing. The price charged for these services can range from zero dollars (for the freeware version) to $300. ^[2]
• Software as a Service:-  Azure is extensively used for developing and deploying applications that can be used as Software as a Service applications and hosted through 3rd party vendors who typically charge for a certain level of service (for example  $50/month for a subscription to a project for users). Currently, Microsoft is using the Azure platform to power its Office 365 applications, SQL server, Windows Intune and Dynamics CRM Online (all software are available on SaaS model). Furthermore, Azure Websites can serve as a SaaS offering as well. A website developer can use exiting modules from Drupal or WordPress (online, open source website creation tools) to deploy websites without the code, deployment, and configuration hassles.

Microsoft’s Cloud Strategy, Azure Pricing Strategy And Revenue Opportunity

Currently, Microsoft generates $85 billion revenues annually. Most of its revenue stems from sale of perpetual software licenses such as Windows OS, Windows Office and SQL server to enterprise clients. However, over the past few years, a host of factors have forced Microsoft to extend its services in the cloud domain. Declining demand for PCs and servers that lowers demand for its software is one such factor.  Yet another factor includes the price sensitivity of clients who want to cut down their costs and only pay for services that are rendered, based on the scale of operations. As a result, Microsoft has adopted a cloud first strategy to bolster its revenue in the coming years.

The Microsoft’s vision of cloud services allows customers to offer not only standalone applications, but also to interact seamlessly with Microsoft infrastructure and on-site applications such as Hyper- V, Windows Server and System Center, as well as SaaS offerings. Over the past few years it has invested close to $15 billion to build its cloud infrastructure. This strategy seems to paying dividends. During the latest quarterly results, Microsoft announced that its commercial cloud computing business (which includes revenues from Azure, Office 365 professional and Dynamic CRM online) generated over $12 billion in revenue this fiscal year (i.e., fiscal 2016, which ended in June). The company said that Microsoft’s cloud computing business (which includes revenues from Azure, Office 365 and Dynamic CRM online) is on track to generate over $20 billion in revenues by FY 2018.   ^[3]

Microsoft is trying to close the gap between itself and Amazon’s AWS services through lower prices and by rapidly introducing new features. According to the company, its clients continue to adopt Azure because of the following reasons:

• Mulinationals continue to adopt Azure as it is the only hybrid and hyperscale cloud spanning multiple jurisdictions, covering more countries and regions than any other cloud provider, from North America to Asia to Europe to Latin America.
• Azure offers its clients with higher level services across platforms such as its enterprise mobility solution. The clients can leverage Azure, Office 365, and Dynamics to give access to its employees’ secure real-time access to data and apps from anywhere
• Azure provides developers with the tools and capabilities they need to build apps and services for the platforms and devices of their choice. A range of Microsoft actions will enable developers to leverage the open source community to develop robust application and services. These include: 1) the new Azure Container service; 2) .NET Core 1.0 for open source solutions; and, 3) Microsoft’s ongoing association with companies such as Red Hat, Docker, and Mesosphere.

According to our estimates, Microsoft’s Azure generated around $2.4 billion revenue in 2015 or 2.64% of the total addressable market. Based on data from Gartner, we estimate that the total addressable market for Microsoft’ Azure is around $107.6 billion.

We believe that, to sell its Azure (Cloud, IaaS and PaaS) services, Microsoft continues to leverage its brand, its existing customer relationships, its history of running global-class consumer Internet properties and its engineering prowess. If Azure’s share were to increase 3% of TAM in 2016, then Azure’s revenues can grow to $3.24 billion in 2016.

We have $57 price estimate for Microsoft, which is inline the current market price.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Azure Pricing [↩]
2. See Website Pricing [↩]
3. Reference from Microsoft cloud site [↩]