Microsoft has taken an "all in" approach to cloud computing, but its revenues from software such as Windows 7 suggests it will need to leverage its traditional, more desktop-bound products for some time to come.
Microsoft's quarterly revenues of $16.04 billion exceeded
many industry analysts' expectations, and suggested that the economy-at least
the portion of it that purchases software-is indeed slowly reviving from the
deepest global recession in a generation. However, a deeper analysis of those
results also reveals a peculiar dichotomy: despite Microsoft's "all in"
approach to cloud computing, the company's fortunes are still very much tied
into that most traditional of tech areas, the desktop.
"Microsoft's messaging around cloud is becoming increasingly
aggressive, but its execution in traditional businesses had revenue pouring in
during [the quarter]," Allan Krans, an analyst with Technology Business
Research, wrote in a July 22 research note. "Windows 7 and Office 2010 have
generated significant growth despite the ongoing economic uncertainty."
During its July 22 earnings call, Microsoft
reported sales of 175 million Windows 7 licenses since the operating system's
October 2009 release
. Overall, Microsoft's Windows division reported
revenues of $4.5 billion, up from $3.2 billion during the same quarter last
year. Krans estimates the company could earn an additional $50 billion in
coming years by converting PCs running older versions of Windows to Windows 7.
Microsoft's Business division pulled in $5.3 billion,
suggesting that both enterprises and SMBs (small and midsize businesses) are beginning to spend on software
after several quarters of slashed IT budgets. Although Microsoft launched
Office 2010 during this quarter, it may be some time before the true fiscal
impact of its next-generation productivity suite becomes clear.
But Microsoft's signature cloud platform, Azure, did not
contribute significantly to the company's bottom line-a fact the company
attributed to its recent release.
"On the Azure side, it's early," Microsoft Chief Financial
Officer Peter Klein told analysts and media during the earnings call. "It's not
material to the financials this year."
During Microsoft's Worldwide Partner Conference earlier in
July, Microsoft announced what it called "IT as a service," offering to take
businesses' IT infrastructure into its hosted cloud. The
company also introduced Windows Azure Platform Appliance
, a service that
brings Windows Azure's cloud-development capabilities into a company's data
center. However, recent surveys by Tech Target and other firms suggest that IT
administrators still have reservations about embracing the cloud, including
issues with security-which in turn could slow industry-wide adoption.
"After being talked about for years, [cloud] adoption is
occurring, but it will take time for customers to grow comfortable with the new
technology," Krans wrote. "Cloud is important and is capturing a large amount
of Microsoft's investment and messaging, but its existing business will sustain
revenue and profit for quite some time."
As suggested by Microsoft's aggressive push at the WPC,
partners will be a key part of driving cloud initiatives.
"The first wave of cloud computing growth was led by direct
sales-led vendors Google, Amazon and Salesforce.com, but TBR believes partners
will play a much larger role in driving the next wave of cloud computing
adoption," Krans wrote. "Microsoft is seizing this opportunity early, as IBM
and Cisco, amongst others, are also vying for partners to commit to their cloud
"Of all Microsoft's strategic assets as an organization, its
partner channel may just be its most valuable and not one it can afford to let
slip as customers transition to the cloud," Krans added. Microsoft's
introduction of Cloud Essentials and Cloud Accelerate, two new components of
its partner program devoted to cloud, could help with this push. "Few IT vendors have cloud-specific designations, so
Microsoft is ahead of the market at this early stage."
Other analysts suggested that Microsoft will likely need to
rely on its flagship products and traditional channels for some time to come,
as many of its newer, non-cloud initiatives have not had time to bear financial
"We think it's too early to see a boost from Kinect
(formerly Project Natal) units, which are slated to start shipping in early
November," Katherine Egbert, an analyst with Jefferies & Co., wrote in a
July 19 research note. "We don't see Bing search or Azure cloud services add
meaningfully, despite recent market share gains and customer wins." Even Office
2010 will need some time to ramp, Egbert added, "although a [fiscal year end]
wave of volume license agreements that include Office 2010 could benefit
unearned revenue." In other words,
Microsoft's head may be in the cloud, but it still remains tied to its desktop.