Microsoft is slowly overtaking Amazon “in the cloud”

Business with the digital data cloud is beneficial to Microsoft.

Christoph Hardt / Imago

Microsoft is currently canceling the forces of gravity. Businesses normally get fat and slow once they reach a certain size, but the exact opposite seems to be the case with the Seattle software giant in its current state. It recently unveiled its sales and earnings data for the third quarter and first quarter of fiscal 2021 and they are impressive. They turned out significantly better than would have been feared given the economic weakness caused by the pandemic.

The cloud provides a strong push

Sales rose a good 12% year-on-year to around $ 37 billion, and net income even increased 30% to $ 13.9 billion. These are impressive numbers for a corporate giant, one of the “heaviest” in the world with a market value of 1.6 trillion dollars. But there is a good explanation: Microsoft is currently benefiting from two megatrends simultaneously and its size as well.

One of the general trends is that more and more software applications are migrating to the cloud. Microsoft recognized this relatively late compared to competing pioneers like Amazon, but it is now catching up. In fact, the cloud business grew nearly 20 percent year-over-year from June to September, and operating profit increased nearly 40 percent. The division is today the most important of the group and the growth prospects are considerable.

The second basic trend is that software is increasingly being offered as a service rather than a one-time purchase. In this way the revenue streams change. They are becoming more constant, more predictable, and probably even bigger overall.

Fast digital transformation

The two trends have accelerated since the start of the corona pandemic. “In two months we have experienced a digital transformation that would otherwise take at least two years,” Microsoft chief Satya Nadella said in the spring. In fact, more and more customers seem to be taking advantage of Internet-based cloud computing services called Azure and established Office products in the form of subscriptions. Whether it’s because they need the software to be able to work from home, or because companies suddenly need or want to make the right infrastructure available to their employees. Video game sales also increased as people searched for ways to pass the time during the lockdown.

This basic development will likely continue for a while. After all, not all consumers and businesses have adapted to the “beautiful new world of work of the future”. In the corporate sector in particular, there is obviously still a considerable need for modernization in terms of IT infrastructure and related applications. There, the temporary disruption of supply chains, especially in older companies, has in some cases uncovered significant weaknesses that are likely to want to close. In this environment, at least in the eyes of experts, Microsoft can leverage its broad product portfolio, extensive customer relationships, and most importantly, its market position.

The “hybrid cloud” should solve this

Size and reputation play an essential role when it comes to reliability, interoperability, and last but not least, safety of products and services. Experts attribute more “power” to Microsoft than Slack or Zoom to fight or prevent cyber attacks. Teams can also temporarily become a growth engine because the software is more universal and better integrated into the software environment than competitors’ offerings. Slack’s antitrust complaint only shows how intense competition has become in this market niche.

Location matters when it comes to developing the “hybrid cloud”. This means IT solutions that run partly on stationary servers and partly on virtual computers “in the cloud”, so the workload can be moved smoothly and smoothly. Such variants are an option for all customers who do not want to invest heavily in new data processing and storage solutions immediately or who cannot fully rely on cloud solutions for security or regulatory reasons. The latter include, for example, financial service providers or companies in the health and public sector. Serious estimates suggest that the market volume for the hybrid cloud is $ 1.6 trillion.

Microsoft’s deep relationships and decades of sales and service experience for large enterprises are seen as an advantage over “newer” IT service providers such as Amazon (AWS), Google or Alibaba. Some market watchers even expect Microsoft to gain ground in cloud services over the next few years over the previous market leader Amazon and gain share in a growing market. However, the competition is getting more intense as others are catching up too. Oracle or IBM, for example, who in the future would like to focus primarily on services from Red Hat, which it took over two years ago.

High expectations are easy to disappoint

What is certain, however, is that Microsoft has long since reached a critical and highly profitable size in this future area that the group can build on. In addition, there is the dominance of operating systems and so-called “collaboration products”, and even with databases, the Seattle giant was recently able to compete with Oracle by opening its products to the Linux community. Overall, the Microsoft group appears to be developing quite robustly. However, the stock price has risen sharply in the recent tech rally and the stocks are relatively ambitious. Very high expectations can easily be disappointed.