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The Seattle software group is growing significantly due to rapid digital transformation despite its enormous size. The cloud business is booming and could even catch up with Amazon in the future.
The digital data cloud business pays off for Microsoft.
Microsoft is currently nullifying the forces of gravity. Companies typically get fat and slow once they reach a certain size, but the opposite appears to be the case for the Seattle software giant in its current state. It recently presented its sales and earnings figures for the third quarter and first quarter of fiscal 2021, and they are impressive. They turned out significantly better than would have been feared given the economic weakness caused by the pandemic.
The cloud provides a strong boost
Sales increased year-over-year by a good 12% to around $ 37 billion, and net profit even increased by 30% to $ 13.9 billion. These are impressive numbers for a corporate giant that, with a market value of $ 1.6 billion, is one of the “heaviest” in the world. But there is a good explanation: Microsoft currently benefits from two megatrends at the same time and also from its size.
One of the dominant trends is that more and more software applications are migrating to the cloud. Microsoft recognized it relatively late compared to competing pioneers like Amazon, but now it’s catching up. In fact, the cloud business grew almost 20% year-on-year from June to September, and operating profit even increased almost 40%. The division is now the largest in the group and the growth prospects are considerable.
The second basic trend is that software is increasingly being offered as a service rather than a one-time purchase. In this way, the sources of income change. They are getting more consistent, more predictable, and probably bigger overall too.
Rapid digital transformation
Both trends have accelerated since the start of the corona pandemic. “In two months we have experienced a digital transformation that would otherwise take at least two years,” Microsoft chief Satya Nadella said in the spring. In fact, more and more customers seem to be taking advantage of Internet-based cloud computing services called Azure and established Office products in the form of subscriptions. Either because they need the software to be able to work from home, or because companies suddenly have to or want to provide their employees with the right infrastructure on the go. Even video game sales increased as people looked for ways to pass the time during the lockdown.
This basic development will likely continue for a while. After all, not all consumers and businesses have adapted to the “beautiful new world of work of the future.” In the business sector in particular, it is clear that there is still a considerable need for modernization in terms of the IT infrastructure and related applications. There, the temporary disruption of supply chains, especially in older companies, has in some cases uncovered considerable weaknesses that they probably want to close. In this environment, at least in the eyes of the experts, Microsoft can exploit its broad product portfolio, its extensive customer relationships, and most of all its market position.
The “hybrid cloud” should fix it
Size and reputation play a critical role when it comes to reliability, interoperability and, last but not least, the security of products and services. Experts attribute more “power” to Microsoft than to Slack or Zoom when it comes to fighting or preventing cyber attacks. Teams can even temporarily become a growth engine because the software is more universal and better integrated into the software environment than competing offerings. Slack’s antitrust complaint only shows how intense competition has become in this niche market.
Position matters when it comes to “hybrid cloud” development. This means IT solutions that run partly on fixed servers and partly on virtual computers “in the cloud”, so the workload can be shifted seamlessly and smoothly. Such variants are an option for all customers who do not want to invest massively in new data storage and processing solutions right away or who cannot fully rely on cloud solutions for security or regulatory reasons. The latter include, for example, financial service providers or companies in the public and health sector. Reliable estimates suggest that the hybrid cloud market volume is $ 1.6 billion.
Microsoft’s deep relationships and decades of experience in large enterprise sales and services are seen as an advantage over “newer” IT service providers such as Amazon (AWS), Google, or Alibaba. Some market watchers even expect Microsoft to regain ground in cloud services in the coming years compared to the previous market leader, Amazon, and gain share in a growing market. However, the competition is getting more intense because others are improving as well. Oracle or IBM, for example, which in the future would like to focus primarily on services from Red Hat, which it took over two years ago.
High expectations are easy to disappoint
What is certain, however, is that Microsoft has long ago reached a critical and highly profitable size in this future area, on which the group can build. In addition, there is the dominance of operating systems and so-called “collaboration products”, and even with databases, the Seattle giant has recently managed to compete with Oracle by opening its products to the Linux community. In general, the Microsoft group seems to be developing quite strongly. However, the share price has risen sharply in the recent tech rally and the values are comparatively ambitious. Very high expectations can easily be disappointed.
