Microsoft’s Azure Cloud Platform Explained – Part 2

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In our previous article (the first in a two part series), we looked at some of the trends in cloud computing. To recap, cloud computing is expected to grow at a robust pace in the next five years. The primary driver for this growth are the cost benefits of outsourcing the hard- and software required for technology based services, which in turn depends on the state of global economy. Cloud based services comprise  Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service and all three are projected to experience healthy demand. Microsoft (NYSE:MSFT) currently provides services for two of the three segments (IaaS and PaaS) through its Azure offering. And it offers the third (SaaS) Microsoft separately on Azure via applications such as Office 365, X-box live, Bing, and  etc on. In this article, we will look at Azure platform from Microsoft.

See our complete analysis of Microsoft here

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Azure Cloud Services

Microsoft launched its Azure platform in 2010, and since then it has posted triple digit growth. Microsoft is pricing different services offered through Azure at different price points, depending on the services and resources rendered. Azure services are built out on the public, private, or hybrid cloud, and some of the services are available under different cloud umbrellas are, as follows:

  • Infrastructure Services: – Azure provides different machine virtualization services that run both Windows and Linux operating systems. Furthermore, it provides cloud storage solutions through StorSimple and Storage and the Azure Virtual Network extends the  on-premises network through site-to-site VPNs Virtual Private Networks).  The company uses a pay-as-you-go model for pricing its IaaS services through which a client only pays according to the usage of services. While this service can cost as less as $13 per month at the basic tier, the cost can increase to $3646 on the high end that incorporate high-performance clusters, modeling and simulations, video encoding, and other compute or network intensive scenarios. [1]
  • Platform services: – Azure platform provides ability to build and deploy a wide variety of modern applications for Android, iOS, and Windows that take advantage of the cloud—including web, mobile, media and line-of-business solutions. Azure cloud services handle all the tedious Operating System details, while the development team can focus on building applications for its users. A development team can either use the PaaS service for building and deploying full scale applications or developing simple websites that do not require more complex configurations for scaling and data processing. The price charged for these services can range from zero dollars (for free version) to $300. [2]
  • Software as a Service:-  Azure is extensively used for developing and deploying applications that can be used as Software as a Service applications and hosted through 3rd party vendors who typically charge for a certain level of service for example  $50/month for a subscription to a project for users. Currently, Microsoft is using Azure platform to power its Office 365 applications, SQL server, Windows Intune and Dynamics CRM Online (all software are available on SaaS model). Furthermore, Azure Websites can serve as a SaaS offering as well. A website developer can use exiting modules from Drupal or WordPress (online, open source website creation tools) to deploy websites without the code, deployment, and configuration hassles.

Microsoft’s Cloud Strategy, Azure Pricing Strategy And Revenue Opportunity

Currently, Microsoft makes $96 billion revenues annually. Most of its revenue stems from sale of perpetual software licenses such as Windows OS, Windows Office and SQL server to enterprise clients. However, over the past few years a host of factors have forced Microsoft to extend its services in the cloud domain. While declining demand of PCs and servers that lowers demand for its software is one such factor, other factor include price sensitivity of clients that want to cut down their costs and only pay for services that are rendered, based on the scale of operations. As a result, Microsoft adopted cloud first strategy to bolster its revenue in the coming years.

The Microsoft’s vision of cloud services allows customers to offer not only standalone applications, but also to interact seamlessly with Microsoft infrastructure and on-site applications such as Hyper- V, Windows Server and System Center as well as SaaS offerings. Over the past few years it has invested close to $15 billion to build its cloud infrastructure. [3] This strategy seems to paying dividends. During the latest quarterly results, Microsoft CEO Satya Nadella said that Microsoft’s cloud computing business (which includes revenues from Azure, Office 365 and Dynamic CRM online) is on track to generate $4.4 billion in revenue this fiscal year i.e. FY 2015 (fiscal year ends in June), if sales keep up the way they’ve been going. Furthermore, according to Synergy research group’s report published in Q3, Microsoft ranks as the No. 2 cloud player with a market share of 10%, and is gaining share at a growth rate of 136%. [4] Synergy research also said that cloud infrastructure services revenue has exceeded $14.5 billion in trailing-12-month revenue, with annualized growth of nearly 50% year over year.

Microsoft is trying to close the gap between itself and Amazon’s AWS services through lower prices and by rapidly introducing new features. Recently, Microsoft cut Azure service prices by 35% and storage prices by up to 65% in response to a wide range of Amazon’s AWS price cuts between 28% and 61%. According to Gartner, Microsoft can leverage its brand, existing customer relationships, history of running global-class consumer Internet properties and engineering prowess to sell its cloud IaaS and PaaS services. If this were to happen, and Azure’s share were to increase 25% of total PaaS and IaaS market (estimated at $84 billion by 2020) then Azure’s revenues can increase from $1.4 billion  (As per Synergy research report) to over $20 billion by 2020. This could result in a 20% upside to our current price estimate.

We have $44.46 price estimate for Microsoft, which is inline the current market price.

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Notes:
  1. Azure Pricing []
  2. See Website Pricing []
  3. Reference from Microsoft cloud site []
  4. Microsoft Cloud Revenues Leap; Amazon is Still Way Out in Front, October 29 2014 []