May 5, 2009 / 1:16 AM / in 10 years

Microsoft's slow-moving cloud may overshadow rivals

SEATTLE (Reuters) - On the face of it, Microsoft Corp stands to be the biggest loser in the cloud computing revolution if it means big companies jettison software on their own computers and move to handling information entirely on the Web.

The upside for the world’s largest software company is that such a revolution is moving very slowly, if at all. And by the time it does arrive, Microsoft could have levered itself into position to emerge a big winner.

“Microsoft is definitely slow and late to the game,” said Matt Rosoff, an analyst at Directions on Microsoft, which sells independent research to the company’s customers and developers.

“But they have a huge advantage when they finally get these services out because most businesses already have large contracts for Microsoft software that come up for renewal every two or three years.”

That gives the Redmond, Washington-based company an in-built edge over emerging cloud pioneers like Amazon.com Inc, Google Inc and Salesforce Inc. They have moved more aggressively into cloud computing — the trend toward running software in remote data centers and accessing it over the Internet — but do not have the power to capture Microsoft’s most lucrative customers.

The promise of what Microsoft could achieve in the cloud is not yet factored into its dawdling stock price, according to Todd Lowenstein, a portfolio manager at HighMark Capital Management, which holds 434,000 shares of Microsoft across a number of funds it manages.

“Cloud computing is an opportunity and a threat for Microsoft. The opportunity is not built in, the threat is,” said Lowenstein. “If they can seize it right, this is a net benefit to them.”

WHAT REVOLUTION?

Chief Software Architect Ray Ozzie put cloud computing at the forefront of Microsoft’s long-term thinking in 2005 with a widely circulated “Internet Services Disruption” memo.

That memo hasn’t fundamentally changed Microsoft’s business model — it still gets the bulk of profit from the traditional licensing of its Windows and Office suite of software — but Ozzie reckons its product teams have become more focused on the cloud and moved away from being “PC-centric.”

“I’m extremely pleased — well beyond what I would have expected — in terms of change to the product and to how we target the market,” Ozzie said at a Seattle technology gathering last week, when asked about the effects of his memo.

Under the banner “Software plus services,” Microsoft is stressing the importance of software installed on the PC being augmented — rather than replaced — by online software.

“We’re not religious about moving everything to the cloud, or keeping everything on premise,” said Chris Capossela, a senior vice president who manages Office products and has been at the forefront of the move toward the cloud. “The more generic a service is, that lends itself to a hosted service.”

Email is a good example of a service that Microsoft reckons can migrate easily to the cloud, and it has trumpeted big contracts with European drugmaker GlaxoSmithKline Plc and soft drink bottler Coca-Cola Enterprises Inc. Between them, the companies moved about 170,000 employees off International Business Machine Corp’s Lotus Notes onto a hosted version of Microsoft’s Exchange email system.

Next year Microsoft plans to roll out its Office suite of applications online, and by then its Azure cloud platform should be up and running, allowing third-party developers to design programs to run in Microsoft’s cloud, expanding the range of tasks customers can do with it.

CANNIBALIZING

Microsoft says hosting companies’ systems in the cloud means they can charge more for services, while the customer ends up saving money on hardware, servers and IT support, potentially taking sales away from companies like IBM and Hewlett-Packard Co.

To back that up, Microsoft has invested heavily in data centers — massive buildings holding stacks of servers — anticipating a boom in online processing and storage.

For security reasons, Microsoft is cagey on details, but says it has more than 10 and less than 100 data centers of various sizes around the world.

It typically invests $300 million to $500 million on new data centers, and has built 500,000 square feet facilities in Quincy, Washington and San Antonio, Texas. Even larger ones are under construction in Chicago and Dublin, Ireland.

Despite that firepower, the company has clearly not pushed its customers hard to take advantage of the cloud.

“They know it’s something they have to participate in, because it’s a threat to their core businesses,” said Sid Parakh, an analyst at regional brokerage McAdams Wright Ragen.

“The problem is: how do you migrate to this new model, because in a way it will be cannibalizing some of their existing revenues.”

Microsoft denies there is any conflict with its core business, and says it will provide the mix of software and services that a customer wants. Many of Microsoft’s cloud-based offerings will “slot right alongside” existing software, said Rosoff at Directions on Microsoft.

Most industry-watchers say the cloud is not an immediate threat to Microsoft, but over the next five years they expect it to take a more dynamic approach to prevent rivals from eating into their core business.

“Go back to the old technology maxim,” said Lowenstein. “You are better off cannibalizing yourself than have your competitors do it for you.”

Reporting by Bill Rigby, editing by Tiffany Wu, Richard Chang

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