Microsoft’s Storm Cloud

As the investor community digs into the details of the cloud services business and its revenues/earnings, the health of Amazon (AWS), Microsoft (Azure) and Google (GCP) and others are being held to increasingly intense scrutiny.

Microsoft, of course, is heavily promoting its Azure Cloud Services and indirectly tying that business to its traditional license and Software Assurance business. Since 2012, Microsoft has been systematically and deliberately changing its licensing models to drive traditional customer data center workloads to its public Azure datacenters.

Beginning with SQL Server, and more recently with Windows Server and System Center, Microsoft has shifted from CPU-based licensing models to core-based licensing models. For Microsoft sellers, this shift provided an “indirect” price increase to leverage, as well as “harmonized” the perpetual compute license model with the Azure subscription model for Windows compute services.

For over a year, AWS has reported its quarterly revenue/earnings as a standalone business that is not comingled with any other Amazon revenue streams. By contrast, Azure revenues are not broken out but rather are included in a larger online services category. Another material difference between the two providers is the way they invoice their subscribers. Most AWS revenue is paid in arrears after the service has been delivered and consumed. Most Azure revenue, meanwhile, is paid in advance with consumption needing to occur after invoicing. Technically, the Azure service should be delivered and consumed prior to Microsoft recognizing that revenue, but exactly how they account for this business is unclear.

Under the circumstances, analysts can do little more than estimate what the Azure business really look likes, and as a result are placing increasing pressure on Microsoft to align revenue with deployment/consumption.

Hence the storm cloud. For Microsoft sellers, moving existing customer workloads from the customer data center to the Azure data center is a high priority, and the most recent changes to Windows Server licensing are forcing the customer’s hands. Specifically, the shift to core-based licensing will result in higher pricing for many Windows Server licensees whose CPUs have more than 8 cores. Through these and other licensing tactics, Microsoft seeks to convert customer budget for ongoing Software Assurance to Azure subscription spend.

Microsoft recognizes the need to eventually demonstrate how Azure revenue/earnings compete directly with AWS and others; this will require higher levels of deployment/consumption so that revenues can be recognized through more traditional accounting methods. While most customers will, over time, consume a greater measure of compute, storage and networking from cloud providers, Microsoft customers will experience intense pressure to artificially accelerate their journey to the Azure cloud.

As a customer, your best position to keep Microsoft in check is to clearly align “time to benefit” for workloads either migrating to or developing in the cloud. The process of moving to a new licensing model for Windows Server, coupled with the complexity of the Azure experiments, is enough to confuse anyone. Without a well-defined plan in place, you could be spending money unnecessarily.

About the author

Louis joined the team in early 2014 after nearly 20 years with Microsoft Corporation. Louis has compiled a track record of Enterprise client success underpinned by customer focus, strategic thinking, organizational agility, problem-solving acumen and impactful knowledge transfer which has established his reputation as a Microsoft licensing expert.