Microsoft reported its worst third-quarter profits in five years Thursday, but the concerning news of the day came not from the company’s Redmond headquarters, but from South Lake Union.
The company’s dip in profits — $4.99 billion, 12 percent lower than a year ago — was expected; Microsoft’s earnings per share was actually 10 cents higher, at 61 cents per share, than analysts surveyed by Bloomberg predicted. CEO Satya Nadella is shifting emphasis away from Office and Windows on PCs, long the company’s financial stalwarts, toward mobile and cloud properties.
Microsoft announced some good news Thursday on the mobile/cloud front: Office 365 subscriptions jumped 35 percent, and cloud revenue (which includes infrastructure and applications revenue) more than doubled year-over-year. “Customers continue to choose Microsoft to transform their business and as a result we saw incredible growth across our cloud services this quarter,” Nadella said in a statement. But compared with the announcement Amazon.com made Thursday, Microsoft’s cloud success, a cornerstone of Nadella’s strategy, seems paltry.
For the first time, Amazon released revenue and profit figures for Amazon Web Services, its commercial cloud infrastructure, and the company confirmed long-held assumptions that AWS is a stalwart. AWS revenue was $1.57 billion in the company’s fiscal first quarter, and the division turned a $265 million profit.
Amazon is the undisputed leader in the cloud infrastructure market. As of fourth quarter 2014, AWS’ market share was 28 percent. Microsoft was in a distant second at 10 percent. AWS’ run rate — $5.16 billion — is smaller than Microsoft’s cloud run rate of $6.3 billion, but Microsoft’s total includes applications designed to run on the cloud.
AWS’ dominance over Azure, Microsoft’s cloud computing platform, is partly a product of its five-year head start, and its success doesn’t mean Azure and the applications designed to run on it can’t continue adding users and revenue. But if AWS is the most popular cloud platform, then companies must use applications that are compatible with AWS. This could be a blow to Microsoft, which would like to be the one-stop shop for cloud computing, but is increasingly being forced to make cloud-based applications available to devices and platforms outside its own ecosystem.
On Friday, Amazon CEO Jeff Bezos made clear in a letter to shareholders that AWS will remain a linchpin to the company’s growth. “Why am I optimistic?” Bezos wrote. “For one thing, the size of the opportunity is big, ultimately encompassing global spend on servers, networking, data centers, infrastructure software, databases, data warehouses, and more. … For all practical purposes, I believe AWS is market-size unconstrained.”
If Bezos’ infinitely huge market exists, then Microsoft will continue to see growth in cloud services, but that growth will resemble Microsoft’s growth in mobile — far slower than leading competitors.
Nadella’s emphasis on cloud is different than former CEO Steve Ballmer’s focus on devices, but it’s similarly following in the footsteps an industry leader. Amazon in the last two days made clear it’s the dominant cloud player, and Microsoft again is trying to take over a sector that a competitor already has a stranglehold on.