This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

How Microsoft Is Inching Closer Towards Amazon

NEW YORK (TheStreet) -- Microsoft's (MSFT - Get Report) fiscal 2014 third-quarter cloud results demonstrated that the company is catching up to Amazon Web Services' (AMZN - Get Report) market share in the enterprise space. But it's unlikely to surpass Amazon any time soon.

During the quarter, Microsoft saw Azure sales grow over 150% and Office 365 revenue increase over 100%, the company noted when reporting earnings results. Considering the company has not revealed the size of its customer base for either product, it's difficult to gauge exactly how impressive the amplitude of the growth really was.

Still, the 100% plus surges are nothing to sneer at and show that like competitor Google (GOOG), Microsoft is clearly offering credible, alternative opportunities to AWS in enterprise cloud. Microsoft continues to demonstrate that it has bit by bit been lessening the dominance of AWS over the last two years, and that's not only good for Microsoft, but also healthier and more balanced for the enterprise cloud market in the long-run.

"A 100% rise in this market is obviously very good but it's not something that we need to translate as Microsoft being ahead of the rest," said Laurent Lachal, senior analyst and group lead at Ovum Software Group's cloud computing research group. "That's not the case. It's not what's happening. It's well placed but I don't think that on the basis of these figures Microsoft positions itself as ahead of all the main competition in the market." Lachal says Azure, Microsoft's direct competitor to AWS, needs to keep up with the 150%-type increase highlighted in its latest financial results in order to continue catching up with AWS.

"Still, it does stay in the top three, and that's good."

Lachal says given that enterprise cloud growth is still in its early stages, Microsoft and Google are taking the right approach by not focusing on a very specific set of strategies, but rather concentrating on execution. In other words, placing heavy emphasis on pricing and performance, support, and the expansion of their portfolio of services.

"It's a long, distant race, and therefore what's important is an ongoing improvement of all these levels rather than a big announcement along the way," said Lachal.

Something to keep an eye on though is that the gross margin of Microsoft's business-oriented cloud services has been less than the gross margins of Microsoft's other businesses. Lachal says that margins in the cloud are typically not going to be as large as the margins Microsoft is used to having. This is further challenged by the ongoing price-war from Google and AWS.

While Amazon is particularly eager to expand pricing pressure from its core services of compute and storage towards other services, Microsoft is obviously much less comfortable with price wars beyond compute and storage. Microsoft will likely cope with this long-term challenge by offering an increasingly sophisticated cloud services portfolio that it can charge more premiums on.

The shift to the cloud "will challenge Microsoft to reinvent itself as a company which may not in the long run have the same ability to have the same level of profitability that it used to have," said Lachal. "That's a challenge for the company and its shareholders."

-- Written by Andrea Tse in New York

Follow @atwtse
>Contact by Email

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Submit an article to us!
SYM TRADE IT LAST %CHG
AMZN $423.04 0.04%
MSFT $48.24 -0.85%
AAPL $128.70 -0.19%
FB $78.81 -0.23%
GOOG $540.78 0.54%

Markets

DOW 18,070.40 +46.34 0.26%
S&P 500 2,114.49 +6.20 0.29%
NASDAQ 5,016.9290 +11.5380 0.23%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs