Cloud Wars: Can Microsoft Overtake Amazon?


Peter Cohan, Contributor

April 26, 2015

The cloud — a service that lets people and organizations rent computing services for a monthly fee — has turned into a battlefield of giant companies.

And despite intense price-cutting by rivals such as Google Cloud Computing and Amazon’s AWS, we learned on April 23, that there is profit in the cloud.

At the pinnacle of this $100 billion industry sits AWS — but Microsoft Azure is growing fast. Can it catch up with its Seattle rival? I see two reasons it will not.

Before getting into that, let’s look at the cloud computing industry. The idea of renting computer access has been around at least since the 1960s. What has happened in the past to renting access to computers is that it lost its competitive edge when minicomputers came along.

After all, why rent computers from another company that might not keep things running 100% of the time or respond to your frantic calls about slow response time when you can buy your own computers and control everything yourself?

In recent years, more organizations have found that running their own computer systems is a different kind of pain in the neck. And more of them are concluding that it is less expensive to pay a monthly fee and outsource all the headaches of keeping up with the latest technology to a company for which computing is its business focus.

Amazon got into this business — defined in its latest quarterly report as ”compute, storage, database, and other AWS service offerings for start-ups, enterprises, government agencies, and academic institutions” — in 2006.

But until that report came out, I never realized Amazon was making money at it. This profit was surprising given rampant industry price cutting. For example, in October 2014, Google cut its prices 38% and in December 2014, Amazon’s AWS cut its prices between 6% and 24%.

Nevertheless, on April 23 Amazon reported its AWS results for the first time. They were surprisingly good –  Amazon’s AWS posted a 17 percent operating margin on nearly 50% higher revenues of $1.57 billion in the first quarter.

Microsoft is no slouch in this market — which it defines differently as software as a service. According to its most recent quarterly report Azure aspires to enable “organizations to securely adopt software-as-a-service applications (both our own and third-party) and integrate them with their existing security and management infrastructure.”

These Microsoft services include ”identity and directory services, rich data storage and analytics services, machine learning services, media services, web and mobile backend services, and developer productivity services.”

Its CEO, Satya Nadella, built the Microsoft Azure cloud service from scratch and posted an even more impressive result on April 23. As he explained in Microsoft’s conference call, the cloud business “more than doubled in sales from the previous year and now has an annualized revenue run rate of $6.3 billion.”

The comparable annualized figure for AWS is $5.2 billion, according to the New York Times.

Synergy Research reports that AWS has nearly three times the market share of Microsoft. In 2014, it noted that AWS controlled 28% of the Cloud Infrastructure Services market with Microsoft (10%), IBM (7%), and Google (5%) trailing far behind.

Though Azure and AWS are different, it looks like Microsoft’s cloud is growing at twice the rate of Amazon’s. And if that continues, at some point Microsoft will surpass Amazon in the race to the top of the cloud.

But in the view of Gartner, AWS is ahead of Azure in the cloud wars and is likely to stay there. Gartner argues that AWS gives customers more of what they need.

Gartner IaaS Research Director Kyle Hilgendorf  compared AWS and Azure using a ”205-point criteria assessment across eight categories: compute, storage networking, security/access, service offerings, support levels, management and price/billing,” according to Network World.

Hilgendorf concluded that AWS has 92% of the criteria covered while Azure has 75%. Moreover, Hilgendorf found that AWS had 18 required features that Azure did not.

Gartner found that AWS “has five times the capacity of its next 14 cloud competitors combined,” making it easier for customers to add or subtract resources as their demand changes. according to Network World.

But Microsoft does have something good going for it — Gartner research found that 64% of users said their biggest reason for using Azure was their relationship with Microsoft.

Nevertheless, AWS has two big advantages over Azure. Because Amazon is an AWS customer it has greater insight into what its AWS customers will need. Moreover, Amazon is not tied to supporting a particular brand of software — while Microsoft is ultimately seeking to monetize Windows and Office.

Meanwhile, with the NASDAQ surpassing its 2000 high, Amazon stock set a new all-time high in April 23 after-market trade, while Microsoft shares remain 17% below theirs.

This article was written by Peter Cohan from Forbes and was legally licensed through the NewsCred publisher network.

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