Company of the Year: Microsoft
Commercial cloud platform and services, Office software products and communication platforms for the enterprise.
Microsoft had a FY17 revenue increase of $2.4B, up 10% year-over-year, driven by server products and cloud services.
Azure revenue growth in FY17 was 99% year-over-year, and the company hit an annualized run rate of $18.9 billion. The company will continue to chip into AWS' market lead slowly but steadily.
It may be a dinosaur in Silicon Valley relative to other tech companies, but Microsoft won't be going extinct anytime soon.
The company's transition to an enterprise cloud focus over the last few years has transformed it into a different powerhouse than it was in the hands of founders Bill Gates and Paul Allen.
Under current CEO Satya Nadella's leadership, the company is focusing intently on "intelligent cloud" — having moved on from a "mobile first, cloud first" strategy — with an eye on the future in mixed reality, artificial intelligence and quantum computing.
Yet the company's reach extends well into other enterprise markets. Microsoft and Google are the only tech giants with a significant share in all three public cloud markets: Iaas, PaaS and SaaS.
Microsoft, however, boasts a larger share than Google in all of them — taking home No. 1 in SaaS and No. 2 in PaaS, according to Gartner's breakdown of market shares.
Worldwide Public Cloud Service Market Share in 2016
The breadth and depth is grounded in the company's wide economic moat. More than 1 billion people use Microsoft Office, and there is no equivalent program that comes close to unseating Office from its throne.
Its dominance is so strong that, "one of the interesting paradoxes about Microsoft is that you basically can't live without Office, and now they've made it so that you can't get away from it," said Carl Brooks, service provider analyst at 451 Research.
Microsoft has bolstered Office further by ensuring its interoperability across competitors' platforms, an effort it has carried out across other products. With more than 80% of desktop activities taking place on Windows, it has vested interests in functional compatibility across platforms for enterprise use.
With the sustained competitive advantage conferred by Office, Microsoft had the flexibility and resources to grow and expand enterprise offerings with a foot already in the door of almost every computer user.
For enterprise customers, familiarity with the Office platform, among other Microsoft products, makes new agreements a "nice, natural extension for their relationship" with the company, according to Ed Anderson, VP and distinguished analyst at Gartner. "A lot of customers look at Office 365 as a natural path for their office investments, and, consequently, we see those customers look at Azure as a natural extension to their data center investments, their .NET investments and their office investments."
If you look at their public financial disclosures, license sales are flat until you get to cloud. Cloud is the only part of Microsoft that is growing.—Carl Brooks, service provider analyst at 451 Research
Microsoft's future success is grounded in the Azure cloud platform, under which intelligent cloud revenue steadily increased. Azure saw 90% year-over-year growth and recently hit the $20 billion revenue goal — set in 2015 — a year ahead of schedule.
"If you look at their public financial disclosures, license sales are flat until you get to cloud," Brooks said. "Cloud is the only part of Microsoft that is growing." The company also touts a strong set of cloud offerings, such as Big Data analytics and visualization and Dynamic 365, according to Anderson.
By FY19, the company expects two-thirds of its Office users to be in the cloud, and enterprise customers will find an easy one-stop-shop platform. Microsoft 365, which bundles Windows 10 and Office 365, Microsoft Teams, collaboration technologies, open source projects and AI capabilities are all available on the Azure platform.
Microsoft has also renewed focus on its partners and service providers for hybrid cloud efforts, according to Brooks. Enterprise customers can get a host of products and services as a package deal, and adding new functionalities to plans is almost effortless.
Microsoft may not be a major player in virtual networking, hypervisor or ERP, but it already has a large enough stake in SaaS, IaaS and PaaS that dominance in these other markets is not necessary for its overall success.
In the past, Microsoft has succeeded by offering the best, and not necessarily the first, technology use cases, so down the road it may choose to up its stake in these other markets.
Brooks described it as "the typical Microsoft head-in-the-sand approach to everything in the idea market." By waiting until pioneers in the market validate the technology and then taking the tech up itself, Microsoft can avoid stumbling into a dead-end or unprofitable segment.
With the talent to take on new endeavors, and the resources to bring in the top talent from outside if needed, Microsoft can bide its time.
A lot of customers look at Office 365 as a natural path for their office investments, and, consequently, we see those customers look at Azure as a natural extension to their data center investments, their .NET investments and their office investments.—Ed Anderson, VP and distinguished analyst at Gartner
Advanced technologies like AI, however, offer an important case study on how Microsoft brings new products to the market. According to Brooks, Microsoft's AI capabilities are far beyond what its enterprise customers are able to buy or use. "What Microsoft, and Amazon, are doing in this is finding palatable and consumable ways to bring this out to the enterprise in small, small bites."
Such a gradual and piecemeal integration is key to prevent companies from being overwhelmed by new technologies and thereby disrupted. Microsoft did the same thing slowly transitioning customers to newer, and now cloud-based, Office generations.
Microsoft is willing to cut big losses, as seen this summer with the discontinuation of Windows phone production and support. Cutting losses, however, did not mean a cut for mobile strategy.
"The missteps of the past have not been kind to them, but it's notable that they haven't given up, and we're seeing Microsoft technologies on mobile platforms that we haven't seen before, and I think that's a good sign for the future." Anderson said. "Those who have invested in Microsoft technologies see that there is a mobile path for them as well."
Microsoft will continue consolidating enterprise applications on Azure to challenge AWS, which stands in a league of its own in the IaaS market. Microsoft sits in a powerful position, but to remain competitive it needs to be a market leader in AI and integrate the technology throughout enterprise offerings.
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