Microsoft gets that Windows is done. But it's betting companies will drag heels en route to the cloud

By Fritz Nelson , written on July 5, 2013

From The News Desk

Microsoft is Teflon. Hurl the insults at its lackluster mobile presence, predict a demise tethered to the quickly sinking PC market, and bash its leadership because it appears to change more frequently than American Idol judges (most recently XBox head Don Mattrick, CFO Peter Klein, and Windows chief Steven Sinofsky). Yet here stands Microsoft, unfazed, seemingly oblivious to the mud being splattered on its trousers.

Despite all of the negativity and doubt, especially around Windows 8, and a stock price that has been as progressive as an LA traffic jam, Microsoft has managed to diversify its portfolio and make big bets on cloud, mobile, social, big data and even the hot new marketing automation category – not that most people would notice.

Not only is Microsoft positioned to weather a downturn in new Windows deployments, it will thrive in the long run because the company realizes that most customers will move slowly to the cloud. That’s right: enterprises aren't quite as ready to embrace the cloud as blindly as all the froth around companies like Workday and Google and Salesforce suggests.

It’s time to stop obsessing about the growth rates of Software-as-a-Service (SaaS) companies that are still a rounding error for IBM and Oracle and Microsoft, and temper the apparently foregone conclusion that on-premises software is all but dead. IDC predicts that by 2016 $1 out of every $5 spent on software will be on a cloud model. In case that’s not clear enough: Only 20% of software revenue will be cloud based . . . three freaking years from now! There's data behind that prediction, and most CIOs won’t find fault with it.

Sure, there’s tremendous promise, but enterprises want the flexibility to keep some applications and business processes on premises, with an eye, and an occasional shift toward the cloud. Technology providers that can promise a seamless transition and flexibility will win. Microsoft's recent moves indicate that it gets the point.

In the past few weeks, Microsoft has announced cloud deals with Oracle and platform-as-a-service provider Engine Yard, a new version of its Dynamics CRM software on premises and in the cloud, and moves around big data, including an alliance with open source Hadoop leader Hortonworks. Microsoft also quietly tucked in further integration of acquisitions like Skype, Yammer and MarketingPilot.

Maybe all of this bores the Ritalin-addled mainstream press and analyst community, but it bodes well for Microsoft's growth and long-term success . . . if they can execute. Admittedly, that’s a big “if.”

It's true: Microsoft's enterprise software offering doesn't have nearly the breadth of Oracle, SAP or IBM, at least when it comes to automating and managing the business processes that run today's enterprise; its cloud isn't even close in market share to Amazon, and Google is likely to make a formidable run with its newly launched Compute Engine (coupled with App Engine); and while Microsoft has some key pieces to be a player in big data, Oracle, SAP, IBM, EMC (with Greenplum), Terradata and a host of hot startups like Cloudera are innovating quickly.

Innovation has never really been Microsoft's ace card. It has always waited until a market develops and critical mass is in sight. Microsoft doesn't usually invent categories. It invades them. Yet this semi-fast follower approach has usually worked, and there's reason to believe it will work again.

Every aspect of Microsoft's business grew in its most recent quarter, including the Windows division (although it was flat if you subtract deferred revenue from Windows upgrade offers). From 2009 through 2012, revenue has grown from $58 billion to $73 billion. Through three quarters of the current fiscal year, the numbers look to be on the same upward track. Oracle, SAP and IBM have each missed their most recent earnings targets, and IBM's overall revenue decreased in its most recent earnings period.

More important for Microsoft's future the servers and tools division was up approximately 11% in the most recent quarter, and its business division was up about 8%. These numbers may not set the world on fire, but those two divisions make up about 55% of Microsoft's revenue. Windows (this includes the OS, Windows Phone and Surface), which is up for the first three quarters compared to 2012, will make up 25% of Microsoft's revenues.

In other words, Windows, the spot where Microsoft is most at risk and drawing the lion's share of criticism and skepticism, is holding its own for now. Moreover, Windows isn't quite the albatross some suspect. In fact, as PC sales decline Microsoft has done everything it should to respond to a new world order of mobile phones, tablets, and hybrid PC devices. Its undoing may have been starting too late, and misjudging the market’s appetite for radical change. But Windows still represents 91% of the desktop market. Surprisingly Windows XP still has about 37% of the OS market, and companies are still migrating to Windows 7. In other words, it’s a long way to bottom.

Meanwhile, Windows 8 adoption continues to trickle along. Last week's preview of Windows 8.1 was a welcome relief, sort of like the passing of a kidney stone. The big changes: the old start menu, the ability to boot to the desktop (rather than the modern, or Metro UI), a nifty rework of SkyDrive cloud storage, and a host of enterprise-friendly features, like support for mobile device management (MDM) (a hint that Microsoft sees the world of "devices," not just PCs). The reviews were mostly positive, and while the new version could convince a few fence-sitters to adopt, the improvements aren't likely to accelerate adoption.

But even if the Windows cash cow withers (it still accounts for about 40% of Microsoft's operating income), there are still plenty of other calves in Microsoft's pasture.

For starters, Microsoft Azure, which competes on the cloud infrastructure front with Amazon, but also provides a platform-as-a-service (PaaS) for software developers, surpassed the $1 billion sales mark, and commands about 20% of the cloud market, according to some estimates. It’s a start.

At Microsoft Build conference last week, the company announced a number of enhancements to Azure, especially around ways that tie together key on-premises and cloud capabilities.

Engine Yard, another PaaS offering whose primary success has been around the popular Ruby language, announced with Microsoft that it would run a version of the Engine Yard platform on Azure. For now that's apparently just for Ruby developers (Engine Yard also supports PHP, JRuby and Node.js), but it's a significant signal that Microsoft is anxious to open Azure to more than just Windows applications (Azure also supports PHP).

Engine Yard was initially funded by Benchmark Capital, but has also received funding from Amazon (the company has used Amazon Web Services and Terremark, Verizon's cloud division, as its infrastructure) and more recently from Oracle. And now that Oracle's applications and database will also run on Microsoft Azure (another announcement from last week), the possibilities become even more interesting. For instance, could this provide an avenue for Ruby extensions to Oracle applications running in Microsoft's cloud?

It's not crazy talk, considering that Microsoft is surely setting up Azure to become the Windows Server of the cloud world. In another smart move, Microsoft created Windows Azure Pack for Windows Server 2012: that means enterprises can run Azure services in the data center, and over time move workloads more seamlessly to Microsoft's public cloud.

Azure isn't the only Microsoft cloud success story. Office 365 is tracking a $1 billion run rate, and Microsoft Dynamics (ERP and CRM) is also growing substantially. Dynamics CRM revenue grew 26%, but still is fourth in market share (at 6.3%) behind Salesforce, SAP and Oracle, according to Gartner estimates.

Tuesday, Microsoft announced a new version of Dynamics CRM, slated for this fall. It will run on-premises or in the cloud, and will include client applications for the iPad and Windows 8 tablets (smartphone apps for iOS, Android and Windows Phone 8 will follow shortly, Microsoft said). The new version will also feature direct integrations with Yammer, Skype and MarketingPilot (Microsoft's newly acquired marketing automation solution).

And finally, last week Hortonworks, which provides an enterprise distribution of Hadoop, announced management packs for Microsoft System Center Operations Manager and Microsoft System Center Virtual Machine Manager. These packs will manage the Hortonworks Data Platform from Microsoft's administrative tools. Microsoft has its own cloud-based (Azure-based) Hadoop platform, called HDInsight, and the idea is that Microsoft can help manage Hadoop on premises, or in the cloud.

Microsoft also wants to feed all of that big data into its business intelligence and visualization tools, notably the ubiquitous Excel (including Excel with Data Explorer) and GeoFlow, which can, among other things, plot data onto a Bing map.

Each move, taken on its own, seems incremental. Taken together, it starts to look like a real and consistent enterprise strategy. The next two or three quarters will demonstrate whether Microsoft can grow its cloud share against Amazon, its enterprise application share against the likes of Oracle, IBM, SAP and Infor, and the size of its enterprise business overall.

Anyone want to place bets?

[Image via Shutterstock]