Cloud computing is a big buzzword, not just in the tech industry but on Wall Street as well. You only need to say that your company is going into cloud computing, and people’s eyes glaze over. There is a lot to recommend cloud computing. It is not a cliche to say that cloud computing is the future.
The days of going to a software store, buying a package off the shelf, going back home, unwrapping that box, taking out a cd or dvd, and popping it into a computer to install that software locally are over. It is done. Even the days of going to a website, clicking on an icon, and downloading software to install locally are soon to be over as well.
The future of software is the cloud. That is right. You get in front of your browser, you go to a website, you log in and you use a software functionality straight from a website. Why is this so compelling? Why is this model changing the how world uses software?
First, it is cheaper. You only use the functionality that you need at that time. Compare this with buying a $500 creative suite from Adobe (NASDAQ:
That is where a lot of the fat of the old software industry comes from. This is precisely the factor that makes cloud computing so lucrative and threatening to Microsoft (NASDAQ:MSFT). The attraction is very easy to explain. As I have mentioned above, if you put software up on the cloud and people use it on their own terms and in their own schedule, you charge per usage. This makes usage more attractive because people feel they are getting a better value on a per usage or monthly basis.
Also, a lot of the headaches of local software, like security and upgrades, are vaporized by the cloud model. When you access a remote server, you know that the remote server won’t plant a virus or spyware on your computer. Also, you know when you are using that remote software that it is the latest version. This makes Microsoft’s cloud products like Office 365 so compelling. You get a battle-tested and proven Microsoft functionality, but at a lower cost.
Unfortunately, this is also the problem with Microsoft’s cloud computing strategy. The margins for its cloud business is lower than traditional software. This is the challenge Microsoft needs to overcome. While its cloud-computing revenue has increased dramatically in the past quarter, it may not be enough to offset the erosion in margins. Microsoft’s cloud business revenue rose by 114% on a year-over-year basis. The problem is that it has a lower profit margin in those businesses. It is going to take quite a bit of reengineering and a lot of restructuring for Microsoft to dominate the niches it is focused on in cloud computing and extract more profit from these businesses.