Microsoft Elaborates on Long-Term Cloud Computing Play

by Stuart J. Johnston

In a presentation to financial analysts, Microsoft's head of server and tools, Bob Muglia, admits the Azure computing cloud initiative is still years from making a profit.

The IT economy is recovering but to date sales of new PCs with Windows 7 to consumers has been fueling tech spending, not enterprise sales, according to a senior Microsoft executive.

Speaking at the Goldman Sachs Technology and Internet Conference in San Francisco Tuesday, Bob Muglia, president of Microsoft's (NASDAQ: MSFT) Server and Tools Business, said he's looking for calendar 2010 to be a better year for IT spending than last year. How much better is the question.

"As we enter this calendar year, we see a lot more interest [from IT departments partly due] to new budgets," Muglia said at the event, which was webcast.

Despite significant interest from financial analysts regarding Microsoft's Azure cloud computing platform, Muglia cautioned not to expect a groundswell of profits from it just yet.

Instead, Microsoft will rely on its enterprise stalwarts -- Windows Server 2008 Release 2 (R2), which was released in October with Windows 7, and SQL Server 2008 R2, which is due out in May -- to bring home the bacon for the time being.

However, even there, it may take some time.

For instance, in Microsoft's second fiscal quarter which ended December 31, while PC sales to consumers were up 20 percent year over year, PC sales to businesses remained flat, according to the company's financial reports.

Still, Muglia said he sees "servers on a path to recovery this year." That comes on the heels of a modest 2 percent increase in revenues from the year-ago quarter for his division in the holiday quarter.

Don't fret too much for Microsoft, however. The Server and Tools Business brought in $3.84 billion in the same quarter which was Microsoft's best quarter ever in terms of revenues and earnings.

Microsoft and Cloud Computing

But what about cloud computing? Not quite yet came the answer.

"Clearly the cloud will be a lot of focus, but it's zero percent of our revenue, today," Muglia said. "Short-term, revenue growth will be driven by 'the big dogs,' Windows Server and SQL Server," he added.

Microsoft just began charging for use of its Azure cloud computing platform at the beginning of February.

The arrival of Azure, though, will help drive sales of a lot more servers running Windows Server. "It will have a major impact on how we buy servers … we will see more servers bought en masse … 100 or 200 at a time will become more common," Muglia said.

Microsoft is making a huge investment in datacenters around the world to support Azure services, and that has also triggered changes in the way datacenters are deployed. "We are now buying complete shipping containers [with servers pre-configured] and in a week or two that's ready to go."

In January, Microsoft announced a $250 million deal with HP to provide infrastructure to applications integration using HP servers and Microsoft software.

In the meantime, though, Muglia cautioned the analysts not to expect Azure to displace its traditional product offerings right away.

"In the short run, over the next three years, the financial [aspects of Azure] are not material," he said.

Stuart J. Johnston is a contributing writer at InternetNews.com, the news service of Internet.com, the network for technology professionals.

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This article was originally published on Wednesday Feb 24th 2010
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