Microsoft expects corporate customers to accelerate their shift to the cloud computing model over the next five years, bringing changes in the company’s financial model, says Chris Capossela, the senior vice president who manages Microsoft’s Office business. In one of the most forthright statements of Microsoft’s view of the shift from in-house to utility-run software, Capossela said, as summarized by Reuters, that “the company will see more and more companies abandon their own in-house computer systems and shift to ‘cloud computing,’ a less expensive alternative.”
The shift to the cloud will be felt most immediately in Microsoft’s big Exchange business for running corporate email and messaging systems:
“In five years, 50 percent of our Exchange mailboxes will be Exchange Online,” said Capossela, who expects a portion of Exchange Online customers to come from customers switching from International Business Machines’ Lotus Domino system. According to research firm Radicati, Exchange will run about 210 million corporate e-mail accounts in 2008, growing to 319 million mailboxes in 2012.
The shift from software licenses to software subscriptions is likely to squeeze Microsoft’s profit margins in its business division, says Capossela, though he expects it will also bring higher and more consistent sales:
The shift to cloud computing will introduce some changes, according to Capossela, in the earnings model at Microsoft’s business division, which generated revenue of $16.4 billion and operating profit of $10.8 billion in fiscal 2007.
Currently, customers pay Microsoft a licensing fee for the software, then buy their own computer and hire their own technology staff to manage those systems. In a services business, the customer will pay Microsoft a larger fee, since Microsoft also runs and maintains all the hardware. But Microsoft’s profit margins may not be “as high,” Capossela said, even though revenue may be more consistent.
Capossela’s assumption that Microsoft will be able to charge companies more under the cloud model seems optimistic, given the different economics of providing software as a web service and the aggressive pricing strategies of cloud pioneers like Google, Zoho, and Amazon.
Capossela told Reuters that the key to competing successfully in the cloud will lie in the company’s ability “to run its computers systems as efficiently as possible to reduce hardware costs.” He says that Microsoft is now adding 10,000 servers a month to its cloud-computing data centers – “a staggering amount of computing power” equivalent to the total hardware currently powering Facebook.