Microsoft is Lonely at The Top
By: Shankar Narayan
Tags: Technology, Illumination, Business

The Transition from Windows is Full and Final

Photo by Tadas Sar on Unsplash

On October 28th, 2020 Microsoft Corporation launched its first industry-specific cloud, Microsoft Cloud for Healthcare, which seeks to integrate the growing bundle of Microsoft’s software application and infrastructure layers into a single product. An extremely difficult task but, if executed well, it will help cement Microsoft’s position at the top of the growing Cloud industry.

“This end-to-end, industry-specific cloud solution includes released and new healthcare capabilities that unlock the power of Microsoft 365, Azure, Dynamics 365, and Power Platform,” wrote Tom McGuinness, Corporate Vice President, Worldwide Health, Microsoft.

It’s a heavy lift, bringing all these pieces together and creating a seamless experience across multiple applications, while also sprinkling them with enough properties to address the requirements specific to a particular industry. But you would rather be in Microsoft’s shoes than those of its competitors.

Image Source: Microsoft

Microsoft took nearly a decade to build its capabilities in the software application layer (office 365, Dynamics 365, LinkedIn) and the infrastructure layer (Azure), while slowly connecting all the different pieces as parts of a single, unified platform.

This unification process of bringing disparate individual systems together and making them work seamlessly for a customer will be a never-ending process that will continue as long as Microsoft Cloud is alive.

Now, with the first industry-specific cloud, Microsoft is attempting to take things up a notch and move from creating a platform that can be used by a single client into a platform that can be used by specific industries, such as Healthcare. It will not be far-fetched to think that Microsoft Cloud for Healthcare is just the first of many industry-specific cloud products that will be launched by Microsoft.

Sign-In is Simple, but Sign-out is Not

Industry-specific cloud products will be notoriously difficult for clients to move away from. To this day, Oracle’s (ORCL) penetration on the database side is what is keeping the company alive in the cloud race, as clients who got entrenched with Oracle databases find it extremely hard to migrate to other cloud providers. The transition has been slow and the stickiness of the products has allowed Oracle an enormous amount of time to stay alive in a cloud industry that has run far ahead of it.

Microsoft’s industry-specific cloud offerings will achieve the same level, if not more, of stickiness with its clients. Once the client starts using all the different software and infrastructure products offered by the Microsoft Cloud Platform, it will be extremely difficult for them to migrate to another service provider.

The migration will not be impossible but will be very difficult to execute, and a time-consuming process that most CTOs would rather not engage in unless there is an overwhelming advantage.

The migration process will only be accepted if it offers enough benefits in the form of cost or if it offers a significant technological edge. Typically, decision-makers look for signs of both cost and technology advantages to be present to move from one service provider to another. But Microsoft will do everything it can to keep the cost of migration higher and benefits of migration lower.

The Global Cloud Industry is still on a Growth Trajectory

Microsoft is the leader of the cloud industry but it is still growing faster than the number two player, Amazon (AMZN). In the most recent quarter, Microsoft CEO Satya Nadella announced that Microsoft Commercial Cloud reached $15 billion in revenue, a growth of 31% year over year. Amazon Web Services reported $11.6 billion in revenue during the most recent quarter, a growth of 29% year over year.

When the number one player grows faster than the number two player, it is a sign that its position at the top is getting stronger.

Through the last eight quarters, both Microsoft and Amazon Web Services increased their cloud revenues as the pandemic helped the cloud industry to grow even further. AWS quarterly revenue increased by more than 29% in each of the last six quarters, while Microsoft achieved better growth than Amazon Web Services, excluding Q4–2020

Data Source: Microsoft, Amazon

Both companies held on to their operating margins; Amazon Web Services reported an operating margin of 30.5% in the most recent quarter, while Microsoft’s Productivity and Business Process segment reported an operating margin of 46.32% and the Intelligent Cloud segment reported an operating margin of 41.75%.

This clearly shows that both companies did not sacrifice their margins to achieve a high growth rate. The top two global cloud players have proved beyond a reasonable doubt that they were not only resilient to the global economic distress caused by the pandemic but that they were able to take advantage of the transition in technology usage due to the pandemic.

The growth rate could further improve once the global economy starts recovering. According to Forrester, “the global public cloud infrastructure market will grow 35% to $120 billion in 2021”.

Microsoft will continue to grow closer to the industry average. The size of its top line, $15 billion in quarterly commercial cloud revenue, makes it harder for Microsoft to grow faster than the industry average.

But the Windows maker may soon be standing alone at the top.