Windows Azure: Why Microsoft Better Get it Right

CIO — Microsoft unleashed a new cloud computing ecosystem at its recent Professional Developers Conference event, even though most observers chose to focus on more obvious, though less important, aspects of its announcement.

Essentially, Microsoft is going to create a Windows-based cloud infrastructure. Many of the details of its ultimate offering are still unclear, and it chose to discuss Azure primarily in terms of how it enables Microsoft-offered hosting (dubbed Azure Services Platform) of Microsoft applications like Exchange, Live Services, .NET Services, SQL Server, SharePoint, and Dynamics CRM, and SQL Server. I'm surprised that so many of the commentators (and presumably Microsoft itself) chose to discuss this offering in terms of Microsoft offering SaaS version of its products. While I think this offering approach is interesting, it falls short of revolutionary; by contrast, the revolutionary aspects of Azure have barely been touched on by all the commentary about the new offering. Let me offer my take on what's really interesting about Azure:

Microsoft offering hosted versions (aka SaaS) of its applications is interesting; however, plenty of people already offer hosted versions of its server products (e.g., Exchange, SharePoint). So the mere fact of these apps being available in "the cloud" is nothing new. However, Microsoft has some interesting flexibility here. Other businesses offering hosted versions of these apps have to obtain licenses for them and pay some amount related to the list price of the product. By contrast, Microsoft, as the producer of the products, can -- should it choose -- price its hosted version nearer the marginal license cost of an instance, i.e., near-zero. Of course, Microsoft still has to pay for the infrastructure, operations, etc., but it can clearly, should it choose, obtain a price advantage compated to competitive offerings. This leads us to the next point: infrastructure pricing.

Microsoft, based on the cash flow from its packaged software offerings, clearly has a capital cost advantage compared to its competitors for hosting Microsoft applications. And, based on its experience in hosting Hotmai, Microsoft clearly has operational experience capable of scaling an infrastructure cost-effectively. Added to its ability to price at the margin for software licenses, this obviously provides Microsoft with the ability to be the low-cost provider of Microsoft application hosting. And this advantage doesn't even include the (dare I say it) synergies available to it based on its common ownership of the cloud offering and the applications themselves.

However, focusing on these aspects of the offering is missing the forest for the trees, so to speak; perhaps a better way to say it is that it focuses on the low-hanging fruit without realizing there is much more—and sweeter—fruit available just slightly further beyond the low-hanging stuff. And that's where Azure gets interesting.

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