Cloud Awakens Microsoft's Server and Tools Giant

Has the cloud awakened a sleeping giant at Microsoft? The cloud is the future of IT, and Microsoft's Server and Tools business has the company poised to cash in on that opportunity. Server and Tools is now Microsoft's third-largest unit, approaching parity with Windows and Office.

REDMOND, Wash.-Has the cloud awakened a sleeping giant at Microsoft?

Well, as quiet at it is kept, Microsoft's strong, steady and increasingly effective Server and Tools Business has crept into the limelight as one of the company's major sources of income. It is beginning to challenge long-term cash cows such as Windows and Office in contributing to the Microsoft bottom line.

At the 2010 Microsoft Financial Analyst Meeting (FAM) here, Bill Koefoed, Microsoft's general manager of investor relations, said Server and Tools ended the 2010 fiscal year "with record revenue and record profits. It is now a $15 billion a year business and is growing at a good pace."

Indeed, Microsoft's Server and Tools Business saw 5 percent growth year over year and 14 percent in the fourth quarter.

Kevin Turner, Microsoft's chief operating officer, broke things down a little further. Turner said Microsoft's business division-which includes Office, SharePoint and other leading products-delivered 29.8 percent of the company's revenue ($18.6 billion), Server and Tools drove 23.8 percent, and Windows and Windows Live delivered 29.6 percent ($18.5 million) of Microsoft's revenue last year. Those three groups alone produced more than 80 percent of Microsoft's business. Entertainment and Devices accounted for 12.9 percent of revenue, and Online accounted for 3.5 percent.

Moreover, enterprise customers accounted for 35.8 percent of the company's business; small and medium business accounted for 20.5 percent; consumer, 16.9 percent; and OEM, 26.8 percent.

With the enterprise clearly the sweet spot for Microsoft's current sales, many observers wonder why the company continues to place so much emphasis on the consumer side. Well, obviously there is room for growth in this segment for Microsoft-as there was in the enterprise a decade ago. Indeed, Microsoft was not seen as an enterprise provider just 10 or so years ago, yet today the enterprise represents more than one-third of Microsoft's business.

Will the same happen in the consumer space? Microsoft certainly hopes so, but the company has much to do in that area.

Turner focused on the enterprise in his morning presentation; however, Microsoft CEO Steve Ballmer emphasized the consumer opportunity during his talk later in the afternoon.

"Microsoft is hitting on every cylinder," Koefoed said.

Koefoed explained that Microsoft has eight core businesses: Xbox and TV, Bing, Windows Phone, Windows, Office, Business Users, Windows Server, and SQL Server. Business Users focuses on the business scenarios of manageability and virtualization, including technologies such as Exchange and SharePoint. And the Windows and SQL franchises capitalize on the cloud with Windows Azure and SQL Azure.

Meanwhile, enablers of those eight areas include Microsoft vehicles such as Microsoft's retail stores and online marketplaces, services and support, the Microsoft Developer Network (MSDN), mice/keyboards, Mediaroom, Visual Tools, and Windows Live, with Microsoft Dynamics also playing a role as its own entity.

However, Microsoft's biggest single focus is the cloud. Like a rudder steering the software giant's overall direction, cloud computing is now behind almost every move Microsoft makes. And Server & Tools has taken full advantage of the push toward the cloud. Not only is Microsoft's core cloud computing play, Windows Azure, part of the Server and Tools business, so are new technologies such as AppFabric, as well as mainstays BizTalk and Windows server.

Moreover, baked into Microsoft's developer story for the cloud is .NET, along with the flagship Visual Studio development platform, and the Silverlight environment for building rich media applications. Despite Microsoft clearly pushing its business solutions and services to the cloud, the company's Server and Tools offerings are perhaps in a front-runner position as they actually enable the move to the cloud.

Al Hilwa, program director for application development software at market research firm IDC, said Microsoft's performance with its Server and Tools business is all the more impressive because "Server and Tools is probably Microsoft's least sexy business." But Hilwa, who attended the FAM event, added: "If you look at the numbers, this is a business that has delivered solid growth in a highly competitive space. They probably can count more big competitors in this space than in any of their other businesses, which really makes these gains even more impressive."

Microsoft built Server and Tools from practically nowhere some 10 years ago and truly leveraged their client strengths to muscle into a difficult space, Hilwa explained, adding that they sell servers to leverage their growth in SharePoint and Office Communication Servers, which are great growth drivers. "They have also benefited from a good rebound in IT spend in the Enterprise while being largely insulated from the ups and downs of the consumer sector," Hilwa said. "Finally, in the last few quarters they have had excellent comparisons with some of the worst quarters in the server business earlier in 2009."

The company is "leading with the cloud," Turner said. "If you want on-premise software, we have that, but we are going to lead with the cloud. Leading with the cloud actually helps Microsoft to sell more on-premise software than we have before."

Turner said Microsoft is focusing on three main things: Driving the Windows 7 and Office 2010 refresh, driving customer satisfaction and growing the company's share.

"We see this opportunity with these old versions out there-XP and Vista," Turner said. Microsoft also is going after older versions of Internet Explorer. "We grew share in the browser space for the first time in a long time," he added, noting that he considered Windows 7, IE (Internet Explorer) 8/9 and Office 2010 to be Microsoft's "triple play."

"Everybody in this company has a quota for going after some of these old versions," he said. Turner also said a beta of IE 9 will be available in September.

Turner then spoke of competing with Microsoft's core competitors including Google, Linux, VMware and Oracle. Reiterating much of what he said at Microsoft's Worldwide Partner Conference earlier in July, Turner cited several customers, including Serena and Datatune, that had gone to Google for cloud services, but came back to Microsoft for its BPOS (Business Productivity Online Standard Suite).

Turner also announced new wins with the Dow Chemical, Hyatt and the University of Georgia.

Meanwhile, Craig Mundie, Microsoft's chief research and strategy officer, said, "The combination of the client and the cloud to create the new computing platform will redefine both how people develop applications and ultimately how people consume them and what kind of things are possible to solve."

"As Kevin reinforced, we're all in on the cloud; we recognize that it's an integral part of how we want to provision computing capabilities," Mundie said. "What I think many people missed over the last few years in the discussion of how the cloud itself was going to evolve and would it ultimately displace or replace everything was that it's really the composite platform that you get by taking these intelligent clients and their evolution, coupling them up through broadband connectivity to the incredible assets that we have in the cloud, and giving people a common new programming model to think of them as one integrated platform, not two things that were developed disjointedly and which people use in an ad hoc way."