The odds are exceptionally strong that just 12 months from now, Microsoft will post cloud revenue of well over $50 billion.
You read that right: a $50-billion-plus cloud business just one year from today for the largest and most-influential enterprise-cloud player in the world.
So why does that matter? Who cares? It matters a great deal for three strategic reasons.
Microsoft’s $50 Billion Aspirations, In Context
The industry leader sets the tone for the entire marketplace. The more success Microsoft has with Azure and its related cloud services and technologies, the more secure and bullish business customers will be about moving to the cloud. (Please see #1 Microsoft Cloud Revenue as Big as Salesforce, SAP, Oracle, IBM Combined.)
It matters because the very practices that Microsoft has put in place to be able to generate $11 billion in its fiscal Q4 ended June 30 will become the standards that those business customers expect, want and demand. That includes but isn’t limited to a full commitment to hybrid cloud and to multi-cloud; a massive overhaul of the sales org to include thousands of code-writing sales experts who can help customers unlock more value more quickly; the ability to play in more than one layer of the cloud; and perhaps most important of all, an unflinching and relentless commitment to customer success led by CEO Satya Nadella and pervading the entire company.
And it matters because heightened customer expectations will force Microsoft’s competitors and partners to improve how they engage with customers. They’ll need to improve what they make, improve how they sell it, and put their customers at the center of everything. For example: Why Microsoft’s Beating Amazon: Cloud Deals with SAP, Oracle and ServiceNow.
Microsoft’s $50 Billion Aspirations, The Ripple Effect
In that context, Microsoft’s runaway cloud business is not just good for Satya Nadella’s company. It’s also highly transformative for business customers around the world. The entire tech industry is riding Microsoft’s momentum into the cloud-centered future.
“Every day we work alongside our customers to help them build their own digital capability — creating new businesses with them, innovating with them, and earning their trust,” Nadella said at the top of his opening remarks during Microsoft’s July 18 earnings call.
“This commitment to our customers’ success is resulting in deeper partnerships; larger, multi-year cloud agreements; and growing momentum across every layer of our differentiated technology stack—from application infrastructure, to data & AI, to business process, to productivity and collaboration.”
So what’s triggering all that success for the Microsoft cloud? From my analysis of the earnings-call commentary from Nadella and CFO Amy Hood, here are the 10 primary drivers behind Microsoft’s moonshot journey to a $50-billion-plus cloud business.
1. Commercial-cloud deals around Azure are getting bigger and longer.
Microsoft “closed a record number of multimillion-dollar” commercial-cloud deals in the fiscal year ended June 30, including “material growth in the number of $10-million-plus Azure agreements,” CFO Hood said on the call.
On top of that, Hood said, revenue growth for the future is looking very strong with commercial bookings growth “significantly ahead of expectations” at 22%, or 25% in constant currency.
And in the related but different category of contracted but not-yet recognized revenue, Hood said that number rose 25% to $91 billion. Microsoft expects to recognize 50% of that $91 billion in the next 12 months.
This is a classic case of the laws of physics at work: mass, momentum, and acceleration. But it also means Microsoft must work harder than ever at ensuring the highest-possible reliability and availability of its cloud. (Please see After 3 Cloud Failures in 12 Months, Microsoft Fortifies Azure Reliability.)
2. An exploding market for “AI-first” apps built by Microsoft or by its customers.
“The quintessential characteristic for any application being built in 2019 and beyond will be AI,” Nadella said. For Microsoft’s customers, Azure Cognitive Services helps developers “see, hear, respond, translate, reason and more into their applications,” while Azure ML now offers “a no-code approach to machine learning,” he added.
For Microsoft’s own SaaS applications, Dynamics 365 “AI-first modules” represent an “entire new class of applications” for which “no competition even exists,” Nadella said. “We can, in fact, have these modules get deployed in commercial customers even on top of existing business applications.”
Now, Nadella did *not* say this and it’s completely my speculation, but that means you *could* have mission-critical SAP workloads running in the cloud on Azure infrastructure, and then have these Dynamics 365 AI-first modules running on top of the core SAP apps. Very interesting.
But back to Nadella and why he feels these new SaaS products represent such a big opportunity for Microsoft:
Again, this is a place where we’re a very low-share player, and so the fact that we’ve become a very competitive supplier of this technology at a time where the world needs more business-process automation, we feel good about the opportunity ahead.” During the call, one analyst suggested Microsoft’s Dynamics business now has annual revenue of about $2 billion, and here’s one of the reasons why Nadella feels that number represents only the beginning: “Dynamics 365 uniquely enables any organization to create digital feedback loops that take data from one system and use it to optimize the outcomes of another, enabling any business to become an AI-first business.
So Microsoft intends to have it both ways: to help developers and customers build new AI-first apps, and to sell its own AI-first apps.
3. Microsoft’s massive deal with AT&T.
Not including its networking business, AT&T agreed to move a huge set of workloads to Azure over the next few years in a deal that some reports have pegged at $2 billion. While that number’s unsubstantiated, Nadella said on the earnings call that it is the biggest cloud deal in Microsoft history: “the largest commercial deal that we’ve signed.” And as big an achievement as that is, it represents a threshold that Nadella said other customers are going to be willing to match. “We have line of sight to many more such deals,” he confirmed.
Now, what does “many” mean in that context: 5? 10? 25? Whatever the number, the repercussion is fundamentally the same. Which is, that once a big global corporation like AT&T says it’s safe to go not just into the water but out into the very deep end in the cloud, then more and more companies will jump in as well. How does the old bromide go? Nothing succeeds like success.
4. The rise of the citizen developer.
In item #2 above when Nadella talks about helping its customers’ developers build their own AI-first apps, he wasn’t referring to some small number of arcane projects; quite the contrary.
If the projection offered by Nadella is even close to being accurate, it will represent an explosion in customer-built applications unlike anything the business world has ever seen. “500 million new apps will get created in the next 5 years—more than the total created in the last 40 [years],” Nadella said. And he gave voice to this new movement, and to the role Microsoft hopes to play in it: “The citizen-developer movement is here, and we are empowering it.”
5. Welcome to the Mixed Reality Cloud.
Helping customers transcend the digitization of processes and enter the world of interconnected physical and digital worlds, Microsoft’s mixed-reality solutions include not only HoloLens 2 and Azure Spatial Anchors but also extend out to Dynamics 365 applications. Nadella cited customer “traction” across multiple industries—including manufacturing, retail and gaming—and said Airbus is exploring more than 300 mixed-reality projects in training, design and remote assistance.
6. “We are the leader in business intelligence in the cloud.”
To support that claim, Nadella cited the capabilities of Microsoft Power Platform—including Power BI—in low-code and no-code development, robotic process automation and self-service analytics. Power BI now hosts more than 25 million models and processes 12 million queries every hour. In the related space of Power Apps, Nadella cited an interesting customer story echoing the “citizen-developer movement” at Chevron. In the past year, Chevron’s use of Power Apps has expanded from 80 users to 5,500, and they have 200 apps in production.
7. Microsoft 365 and Office 365 become slick on-ramps to Azure.
Describing the linkage of bigger and broader Azure engagements to Microsoft 365 and Office 365 deals as a “hero experience,” Hood offered this perspective on how that’s playing out. “The other thing that we saw is increasing focus as we were having more conversations across organizations around Azure and rethinking their digital transformation plans with us. It opens up a very large conversation around the value Microsoft 365 can bring as people go through and think about those transitions.
“And so the fact that we then were also seeing extensions take place of prior commitments in Office 365 to again be longer and include the Azure contract, when that happens, it’s almost like you’re adding new product and new value, and a lot of that gets recognized faster in quarter when you see that happen.”
8. Microsoft’s cloud market is expanding, particularly as more customers move tier-1 workloads to the cloud.
Hood twice referred to the “expansive TAM” (total addressable market) Microsoft is seeing. “Expansive,” in Microsoft parlance, is a highly positive and almost effusive term. “I would say in general what we see, especially as contracts get larger, the opportunity under tier-1 workloads for us to really see TAM growth it’s just expansive,” Hood said in the Q&A session in response to a question about the AT&T deal. She continued:
I kind of think about this as, we have an incredibly strong footprint inside existing enterprises today. That footprint, and you can see it in our results, customers are relying on us for not only that footprint, but as they continue to expand, to sit under the tier-1 opportunity we haven’t seen before. And so we, of course, see multi-cloud in a lot of our larger accounts, but this type of significant commitment is an opportunity I think you’ll continue to see us execute well on.
Here’s one company’s experience with moving mission-critical workloads to Azure: Microsoft-SAP Juggernaut: Huge Pharma Moving All SAP Workloads to Azure.
9. The surging “platform effect” of Teams.
Nadella:
I think there’s no question this last fiscal year has been an absolute breakout year for Teams in terms of both the product innovation and, most importantly, at-scale deployment and usage that we are seeing. And I think, in fact, unlike any other time other than Windows, we’ve not had this kind of platform effect. Office has, obviously, had very, very successful individual products that have been deployed broadly, but each of them was a singular tool. Perhaps SharePoint was the last time we had a platform effect of this kind.
10. Teams is not only changing processes, it’s changing cultures.
Now used by 13 million users each day and 19 million each week, Teams has become a real force within big companies. Here’s how Hood sees that playing out: Customers “see Teams that can not only change what Satya talked about, but also is about culture change, in terms of employees being able to be involved and collaborate regardless of org chart. And that is what you’re going to see. When you have 500 million new applications built in the next five years, I believe Teams will be one of the major interfaces through which that experience and business process reinvention will happen.”
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