Microsoft reported an astonishing quarter, and I don’t think it’s a coincidence that they mentioned “cloud” 35 times on their earnings call. Unlike IBM, Microsoft was aligned with enterprise strategic shifts through 2020, and it showed on their bottom line. One question Microsoft’s results raises is whether the alignment was accidental or intentional, and if the former, whether that serendipity can be counted on in quarters to come. Another is what fundamental trends might be behind the good news.
Microsoft’s cloud revenues were up 34% year-over-year, which is surely a good performance, but that growth isn’t out of line with Microsoft’s historical cloud performance. Microsoft characterized their success as showing that revenues were returning to pre-COVID levels, which doesn’t address the big question, which is why that’s happening. There are two possibilities. First, Microsoft is simply riding a wave. Second, Microsoft sees the future, reads the wave, and is prepping to take advantage. Which it is will not only determine Microsoft’s fortune, but perhaps determine the shape of the industry.
Microsoft gained in commercial and consumer computing, including PCs, which is also a possible business-as-usual sort of indicator. If we were to think about the technology story most likely to benefit from WFH, Microsoft ticks all the boxes. Workers need cloud technology and better home computing, and consumers stuck in the house need some outlet for their frustrations. Gaming and online content and social media fit the bill. This is why you could ask whether Microsoft was just lucky.
One comment Nadella makes might be a reinforcement of the “serendipity” point: “We’ve always led in hybrid computing…” is true according to what enterprises have told me from the first. Amazon has gone after the startups, and Microsoft the hybrid-cloud enterprises. Certainly, their history in the space benefitted them in the quarter.
The counterpoint to that possibility, perhaps, is this quote from Nadella. “What we are witnessing is the dawn of a second wave of digital transformation sweeping every company and every industry. Digital capability is key to both resilience and growth. It’s no longer enough to just adopt technology. Businesses need to build their own technology to compete and grow.” This is a pretty clear statement of the transformational condition that I said (in yesterday’s blog) IBM didn’t get.
Resolving the accident-or-plan point is going to require some deeper analysis. If we took that second quote from Nadella as a mission statement, we could interpret it to mean that Microsoft believes that 2020 ushered in buyer awareness that their prevailing IT model, meaning the way they use IT to support productivity, needs a revamp. That revamp will come by retuning the business-process-to-IT relationship, and to make that happen optimally there has to be an improvement in their “digital capability”.
But what about this two-sentence piece: “It’s no longer enough to just adopt technology. Businesses need to build their own technology to compete and grow.” Is Microsoft advocating that enterprises trash packaged software and roll their own, or what? There are a number of possibilities.
First, Microsoft knows that hybrid cloud is really about building cloud front-end pieces to legacy business applications, not “migrating” things to the cloud. Microsoft has a strong development base, with tools and website support, and not only for Azure but for legacy platforms too. They also seem less inclined to try to push cloud prospects into development strategies that would lock users into their cloud platform. A development-centric push would also help fend off IBM, whose Cloud Paks are aimed at development.
Second, Microsoft believes that SaaS platforms like Salesforce could be their real competition. Line organizations are more likely to acquire SaaS than PaaS/IaaS for obvious reasons. The “digital transformation” Nadella sees might empower line departments because it has to be accompanied by a business transformation.
Third, Microsoft may think that IBM will push packaged-software, vertical-focused, “Cloud Paks”, or that Oracle’s cloud application suites will prove interesting to buyers. Microsoft, I think, believes that the hybrid cloud model really does require a development focus, but vertical application plays could muddy the waters. Note that Microsoft plays up the database and analytics features of Azure, and IBM has married “hybrid cloud” and “AI” in their positioning, which could indicate they’re going to take a run at the space. Microsoft would then need to nail it down.
Can the call give us any hints? I think it can. After his broad comments on the cloud, Nadella jumps into a listing of the PaaS elements that make Azure a strong offering. Remember that Azure has been as focused on PaaS as on hybrid cloud, and a PaaS model facilitates development by providing a set of cloud-ready tools that add capability to applications. Most of Microsoft’s emphasis is on “horizontal” things like governance, AI, analytics, and security. Security is theoretically stronger in a PaaS cloud model because the cloud provider has more control over intercloud, inter-component workflows.
Speaking of horizontal, Microsoft’s Office 365 and Teams solutions are a great way to address the new digital transformation. I’ve seen significant uptick in Teams adoption, displacing Zoom in many cases, in just the last couple of months. Microsoft is working to facilitate integration between the two products, and also to provide tools to jump into Azure applications from their online office and collaboration platforms. There’s enough going on, under this scenario, to argue that Microsoft has read the direction of its digital transformation correctly.
You could indeed be justified in believing that Microsoft is planning their success and not tripping into it, but I’m not completely confident. For one thing, they were vague about their guidance on cloud revenues, while at the same time providing hard numbers in most other segments. For another, their positioning to prospects and customers doesn’t align as closely to the theme of a new digital transformation age as their earnings call did.
This could mean that Microsoft sees the digital transformation as a relentless, almost-natural, trend rather than something they could initiate, promote, and own. It’s like “we’re building mills on the river”, because that’s where the water is. It’s a big step to create a canal to bring the water to where you want the wheel to be. Microsoft might be in that first stage of insight, seeing trends better than (say) IBM, but not in control of them. That’s consistent with positioning digital transformation to the financial analysts (we can make money on it) but not to the prospective buyers (you’re lemmings marching to the digital sea, and we don’t need to push you along).
I think Microsoft does see the future better than most, and thus has exploited it better than most. I don’t think they grasp the why and where of the current “digital transformation” trend, though, and that means somebody else could step up and sweep Microsoft out of the way. Who that might be is simply impossible to say at this point, but we can fairly say that whoever it is will have to exercise naked aggression. This market isn’t waiting for slowpokes.