Microsoft is “All In” With the Cloud. Let’s Talk Winners and Losers.

March 8, 2010 Appirio

Glenn Weinstein, CTO
In 1995, Bill Gates issued a famous internal memo that changed Microsoft, and an industry. He transformed from skeptic to advocate of how the Internet would change everything. In his memo he wrote: “I want to make clear that our focus on the Internet is critical to every part of our business.”

Last Friday, Steve Ballmer has had his “Gates moment” by embracing the notion of the public cloud, and established for Microsoft the clearest cloud strategy of any of the big four of business software – “We’re all In” – “When it comes to the cloud, we are all in. We are all in across every product line we have and across every dimension of the cloud.”

While Microsoft still needs to execute in alignment with this vision (to be clear, some already are raising doubts – and even now, 15 years later, Microsoft is still trying to execute on the 1995 memo), there is no doubt that Ballmer’s speech is a clear and significant signal that times have changed. The ramifications of the strategy are dramatic for Microsoft, and for the entire industry.

Let’s look at some of the potential winners and losers that may emerge from Microsoft’s new direction.

Probable Losers: SAP, Oracle, and IBM – Thousands of pages of corporate strategy analysis have been written at SAP, IBM, and Oracle on “the cloud” and what it could mean to their customers, yet none have articulated any cogent strategies about what to do. It ranges from complexity and misdirection at SAP, to denial at Oracle, to attempts to freeze progress by IBM. But now, every prospect, customer, analyst, employee and partner will ask the big vendors to compare their cloud approach to Microsoft’s.

Much of the focus to date around Microsoft’s cloud strategy has been to frame it in competition to Google, but the bigger story is that Microsoft now has the ideal platform to effectively claim market share and attack $50 billion or more in revenue from their largest enterprise software competitors. Microsoft seems to have made the realization several years ago, as various initiatives coalesced around what has now become Windows Azure, that far from cannibalizing server software sales, public cloud computing subscription sales could drive net revenue growth. Microsoft’s leadership in this area is now clearly ahead of SAP, Oracle, and IBM. A clear target and a multi-year head start make a fundamental switch in the business model seems less risky.

Losers: The Big Legacy SIsAccenture still may think the Tiger Woods fiasco was as bad as it gets, but Microsoft’s new direction could completely change the economic structure on top of which the global SIs have spent the last thirty years building their businesses. Even with Avanade – its joint venture with Microsoft – Accenture, along with IBM Global Services, EDS (now HP), and other legacy GSIs, face a future where cloud providers are delivering answers, at a much lower cost, to an ever-growing domain of IT problems that SIs have historically solved.

The hardware, operating systems, networks, databases, and application software that companies had to purchase, configure, maintain, upgrade and eventually replace, ad infinitum, are becoming the responsibility of the public cloud providers – now, significantly, including Microsoft. This macro-trend will impact virtually every segment of the hardware and software markets. But because personnel costs represent such a significant portion of the cost of IT operations, Microsoft’s cloud direction will drive huge costs out of enterprise IT largely at the expense of the global SIs.

One clear illustration of this phenomenon can be seen by comparing traditional IT outsourcing with “cloudsourcing.” Global SIs are good at traditional outsourcing because they have mastered the core competencies of managing server farms and operating complex single-instance enterprise software. But these competencies become irrelevant to companies looking to offload their IT operations to multi-tenant cloud providers. Customers now need new types of services that the global SIs not only have no experience delivering, they are actually strongly disincented economically from pursuing them aggressively, for fear of cannibalizing their existing revenue streams.

Winners: Cloud Customers – In this blog, Appirio has written often on the benefits of real cloud computing and the risks of pseudo-cloud strategies. An endorsement of this vision by the biggest on-premise software company in the world will surely amplify the attention customers will put on placing the public cloud at the center of their IT strategy. Customers win because it will lead to faster adoption of the cloud – which we firmly believe is a positive, and ultimately inevitable, evolution. Business and IT leaders will expect more cloud-centric products and solutions, while the tactic of “cloudwashing” old offerings by merely hosting single-tenant software on remote servers will seem more glaringly insufficient. We expect this to accelerate a movement to the cloud that was already happening, shake out some cloud pretenders, and unleash lower costs and higher productivity.

Winner: Salesforce.com – Rising tides lift all boats. Salesforce.com benefits from Microsoft’s endorsement of a cloud strategy that is aligned with what its CEO, Marc Benioff, has been advocating since 1999. While Microsoft is a formidable competitor, their entry will allow Salesforce.com broader access to the full IT market, including bastions of resistance that have clung to on-premise technology and hidden behind the big vendors. As the market increasingly dictates that the only IT battleground that matters is in the public cloud, it seems likely that all the software mega-vendors will look even harder at acquiring Salesforce.com in an effort to catch up to Microsoft.

Neutral: Google – Many of the same factors that make this positive for Salesforce.com apply to Google, which is the other vendor, aside from Salesforce.com, most strongly associated with enterprise public cloud computing today. But Google is more directly threatened by Microsoft, with whom they compete directly in a number of markets. Google’s big differentiator, compared to Microsoft, has been its pure adherence to the public cloud model. Now, Microsoft’s new direction places Google and Microsoft on the same side of the cloud vision ledger and changes the way we look at the competition between them. Instead of pitting the perception of an “old” company that’s vested in desktop and server software vs. a “new” company that’s all about the cloud, we now simply look to see which company can execute more effectively. Google’s purity of vision, and its ability to deliver innovative solutions, have been the keys to the success of selling Google Apps to the enterprise. Now Google must contend with Microsoft’s vast install base and its hard-won knowledge of how to pry open the pocketbooks of corporate IT. To do so, Google will have to create broader solutions.

As for Appirio, well, we are just incredibly excited. Since our founding in 2006, we have have been all in. We have shouted from the rooftops about the benefits of running your entire business in the cloud, and we’ve launched a new business and technology model – known as Cloudsourcing – to support that vision. Not only did we predict that it this has been coming, we believe cloud computing is our chance to join a once-in-a-generation revolution that advances how IT drives core business productivity. Welcome to the party, Microsoft. Who’s next?

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