Microsoft: Potential To Lead Cloud Market? – Seeking Alpha

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As business environments change and data center technologies advance, IT costs have been escalating in tandem driven by increasing IT equipment and staff requirement. Therefore, to increase IT efficiency by cutting costs and increasing flexibility, enterprises are seeking to adopt hybrid cloud computing and build an SPI (SaaS, PaaS and IaaS) delivery model.

Although market leader Amazon’s (NASDAQ:AMZN) AWS is strong in IaaS (Infrastructure as a Service), its PaaS (Platform as a Service) is currently at early stages and the company does not have a presence in SaaS (Software as a Service). Microsoft (NASDAQ:MSFT), on the other hand, is a strong player in all three of the aforementioned cloud layers.

Source: Microsoft

Microsoft’s seamless cloud offering is a significant advantage for enterprise cloud customers that value completeness because this spares them the cost, effort and time integrating various components from different vendors that may be incompatible (not intended to work together).

The emphasis on completeness is likely to be stronger the larger the enterprise, as larger enterprises operate larger and therefore more complicated IT infrastructure compared to smaller companies which are likely to have less demanding IT requirements.

This could explain the results of a survey conducted by Sumo Logic and UBM PLC which found that Microsoft Azure was particularly popular among large enterprises. The survey only included companies with a minimum of 500 employees and the results revealed that Microsoft Azure was the top cloud vendor. Interestingly, more than half of those Azure users were from organizations with more 10,000 employees.

Source: UBM PLC, Sumo Logic

AWS came in second and Salesforce (NYSE:CRM) came in third.

The research report noted that during the early days of the cloud computing market, AWS was the cloud computing vendor of choice helped by a first-mover advantage. However, as the cloud computing market matured, organizations became more comfortable with vendors other than AWS. This market evolution, coupled with the company’s strong presence in all three cloud layers, may explain why Microsoft has recently been narrowing the gap with market leader AWS.

A 2017 survey by RightScale found that while AWS continues to lead, the percentage of respondents running Azure and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) grew significantly while AWS remained unchanged.

IBM (NYSE:IBM) also saw gains, although to a lesser extent than Azure and Google.

Source: RightScale

A separate survey by 451 Research found that AWS was the preferred IaaS provider for 39% of respondents, but for 35% of the respondents, Microsoft Azure was the preferred provider. This is an increase from 2015 when only 22% of the organizations stated that Azure was the preferred IaaS vendor.

Hybrid cloud

RightScale’s survey revealed that hybrid cloud is the preferred enterprise cloud strategy.

Source: RightScale

According to the 2017 ComputerWeekly/TechTarget IT Priorities survey, readying on-premises infrastructure for hybrid cloud was IT decision makers’ number 1 data center investment priority.

Research and advisory firm Gartner has stated that a massive shift to hybrid infrastructure is underway and by 2020, 90% of organizations will adopt hybrid infrastructure capabilities, driven by a demand for agility, flexibility and efficiency.

MarketsandMarkets estimates that hybrid cloud spending will grow 22.5% annually through 2021 to reach almost $92 billion.

To capitalize on this market, late last year, Amazon announced a strategic partnership with VMware (NYSE:VMW). Under the deal, Amazon will be VMware’s “primary public cloud partner” and VMware will be Amazon’s “primary private cloud partner”. Prior to the partnership, it was possible for businesses to integrate their IT infrastructure to run both VMware and AWS; however, it required significant software engineering and expertise to accomplish.

Google too announced a similar partnership with Nutanix (NASDAQ:NTNX), in an effort to position itself in the hybrid cloud market.

Unlike many born-in-the-cloud startups that dominated the early days of the cloud market, larger enterprises that already have invested substantial amounts on IT infrastructure, and enterprises that wish to retain mission-critical and highly confidential data within their servers, tend to opt for a mixture of private (on-premise) and public (third-party) cloud which are managed as a single entity. This setup is known as “hybrid cloud”. Furthermore, for these large enterprises, the migration process from on-premise to public cloud is likely to occur in segments over a period of time, and the only solution to this problem is hybrid cloud where different workloads operate in different environments.

Source: Datamation

The real challenge arises when these different cloud environments (comprised of multiple different systems) need to be connected seamlessly, i.e., to “talk to each other” and be managed as a single entity. This is a complex process and this complexity has been mentioned as a downside of hybrid cloud.

This complexity of installing a hybrid cloud environment gives Microsoft an advantage in the enterprise hybrid cloud market since a number of enterprises already use Microsoft software for their on-premise data centers, and to manage the complexity of hybrid cloud deployment, these companies tend to lean towards Microsoft when deploying their hybrid cloud. With a great number of large enterprises using Microsoft products for years, Microsoft has the relationships and enterprise agreements with these organizations. This gives the company a neat entry-point into the enterprise hybrid cloud market by offering Azure Stack as a cross-sell. Azure Stack is Microsoft’s private cloud software which is targeted at customers looking to run a private or hybrid cloud.

This advantage perhaps could explain the results of RightScale’s 2017 survey which revealed that Azure Stack/Pack was the only private cloud technology to show significant growth compared to competitors.

Source: RightScale

The cloud computing market is still at early stages and the market is changing very rapidly. Microsoft’s competitive advantages under current competitive conditions suggest that there exists a possibility for the company to lead the cloud market which is still at a nascent stage of growth. A report by Pacific Crest Securities estimates that spending on cloud initiatives could triple to US$239 billion over the next five years. Interestingly, the report also suggests that Microsoft could surpass market leader Amazon in cloud computing this year.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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