We’re on a technology hot streak, we’ve covered Facebook, Kogan, Bumble and now we’re back with another Fresh Roundup, this time we’re diving deep into Microsoft, particularly into their cloud business - Microsoft Azure.
- Microsoft and how it has reinvented itself as a cloud business
- The cloud landscape and how Microsoft Azure differs from Amazon Web Services and Google Cloud
- Microsoft’s productivity suite and how productivity applications have ‘unbundled’ over time
- Microsoft’s M&A playbook and how they use M&A to support their growth strategy
Microsoft? What are they up to these days?
Undoubtedly a household name, Microsoft is a technology business that develops and sells consumer and enterprise productivity software, cloud services and infrastructure, gaming, search and hardware.
Known by consumers everywhere for Windows OS and the Microsoft Office productivity suite, they have evolved to become a full-service cloud business over the last decade.
In FY20, Microsoft generated a whopping $143bn at a respectable operating profit margin of 38% (~$53bn) and grown at ~11% CAGR over the past five years. This revenue was predominately driven by Intelligent Cloud, with profitability driven by Productivity and Business Process.
- Intelligent Cloud - $48.4bn (34% of revenue at a 38% margin)
- More Personal Computing - $48.3bn (34% of revenue at a 31% margin)
- Productivity and Business Process - $46.4bn (31% of revenue at a 40% margin)
What is “cloud”?
"Cloud" refers to resources (servers, databases, hardware, applications) that are accessed over the internet by users, rather than having physical resources and hardware that are stored and managed by the users themselves.
There are generally three types of cloud environments:
- Public Cloud - This is an ‘off the shelf’ cloud solution that isn’t tailored to the functional requirements of a customer. The resources of a public cloud are used by many customers at once, hence ‘public cloud’. It’s generally the cheapest type and suited towards SMEs who don’t need specific cloud requirements.
- Private Cloud - This is a configured and customer-specific cloud environment used only by the customer - resources are not shared with other customers. This option offers greater scalability and security than public cloud. It’s more expensive but offers greater customisability to meet the needs of customers.
- Hybrid Cloud - As the name suggests, this combines both public and private cloud environments. The benefits of a hybrid cloud is that it includes flexibility in where a customer chooses to deploy applications or run data processing. It also enables a customer to compartmentalise business operations into public or private cloud to meet demand requirements.
As a full-suite cloud provider Microsoft offers a range of cloud services through its brand, Microsoft Azure. These services cut across these three types of cloud environments and can be segmented into:
- Infrastructure as a Service (IaaS) - Microsoft servers, networking and data centres that enable customers to build applications. IaaS is analogous to leasing land to a customer so they can build whatever they want - but they only get the land, they’ll still need to provide their own building equipment and materials.
- Platform as a Services (PaaS) - Going another step, PaaS includes everything in IaaS and also includes the Operating Systems, the development and database management tools a user needs to build an application. PaaS is analogous to getting both the land and the building materials and equipment to build a building on the land.
- Software as a Service (SaaS) - This would be the applications themselves - in Microsoft’s case, it comes in the form of their Productivity suite and other cloud applications such as Office 365. SaaS would be analogous to renting the house - you get to use land and the finished house, you don’t need to do anything additional except paying for its use.
How does Microsoft’s Azure differ from other cloud providers?
Google Cloud, AWS and Azure are the three big competitors in the cloud wars (there is also Alibaba Cloud but let’s say they’re a minor league player at the moment). All three of these players offer a similar set of cloud services including virtual machines, databases, AI and Big Data capabilities and security services. When you compare the three, there are a few key differentiators:
- AWS is leading the pack with ~50-60% market share - AWS was the first mover in cloud across the three and stands out with developer functionality and attractive pricing. It’s worth calling out that Amazon’s next CEO, Andy Jassy, is currently the CEO of AWS and will undoubtedly look to continue investing in AWS to fuel Amazon’s growth
- Microsoft Azure is in second place with ~15-20% market share - Azure is a popular choice but has a much lower market penetration due to Microsoft’s lateness to the game. However, they leverage their relationships with existing enterprise customers to ‘land and expand’ their cloud offerings, particularly in Hybrid cloud where they stand above both AWS and Google Cloud. Cloud has been one of Satya Nadella’s (the current Microsoft CEO) core priorities and will be a growth engine for Microsoft
- Google Cloud is predominately a public cloud player and has the lowest market share of the three with only 6%. The last of the three to make it to the cloud leagues but they have started to leverage their expertise in data and AI to differentiate their cloud services
How will Microsoft continue to grow and scale Azure?
Since this chart was published in 2019, Microsoft has gone on to acquire 20+ businesses, including 5G business, Affirmed Networks for $13bn and speech recognition business, Nuance Networks for $20bn
Microsoft has always been an aggressively acquisitive business and have pursued M&A activity as both an offensive and defensive move, moving into a new market or preventing their competitors from acquiring new capability. Since 1987, they have acquired over 250 business and invested in over 60 other tech businesses through their venture capital fund, M12 Ventures. Notable acquisitions include:
- Forethought in 1987, which became PowerPoint - a core part of Microsoft Office
- Visio in 2000 and integrated Visio into the Microsoft Productivity Suite
- Navison in 2002 which became Microsoft Dynamics, their CRM platform
- Skype in 2011 to enter VoIP and support their online communications capability
- Nokia’s hardware business in 2013 in an attempt to reenter the mobile market
- LinkedIn in 2016 to support their CRM and prevent Salesforce from acquiring it
- GitHub in 2018 for access to its developer base and leverage to build an army of Azure engineers and become the go-to platform for developers
As Microsoft continues to invest in cloud, it has started to scale and grow through this very same playbook of aggressive M&A. Both Microsoft and Google are more aggressive in the M&A space than Amazon, knowing that they will need to buy their cloud capabilities if they want to continue to compete.
As we look to the future of Azure we believe Microsoft will leverage its scale, brand and relationships with enterprise customers and its M&A playbook to improve its cloud capabilities.
What’s the final verdict on Microsoft?
Microsoft’s long term future is bright as it moves further down this path and will undoubtedly remain a household name in the future. While we’ve only covered one part of Microsoft’s business in this week’s Fresh Roundup, we covered Productivity and the unbundling of productivity applications in the latest episode of Fresh Capital. Be sure to check it out!
We know Microsoft is a highly mature business and has evolved over time to become the cloud player it is today. While we can’t cover everything we want (otherwise this would an essay!), we want to shoutout to some of our favourite reads on Microsoft