When he considered joining Microsoft two years ago, Stephen Elop compiled a
list of questions to ask the software giant. If he was going to make the
leap from Juniper Networks, the internet router maker where he had been
promised the chief executive’s role, the Canadian had to be sure Microsoft
shared his vision for the future.
“One of my key questions was: is Microsoft serious about the cloud?” Elop
said. He was not the only one who wanted to know the answer.
Because of the pressure to defend its near-monopoly in computer operating
systems and office programs, analysts feared Microsoft would make heavy
weather of the “cloud” — the trend for distributing cheap or free
applications on the internet but charging to host them for customers on
giant, remote servers.
In Elop’s confidential discussions with Bill Gates, the founder, Steve
Ballmer, the chief executive, and Ray Ozzie, the chief software architect,
the wraps came off Microsoft’s plan to go online. “They weren’t just
flirting with it, they were going the whole hog,” said Elop. “That is what
made me feel good about joining this organisation.”
If Microsoft’s online services arm is on the offensive, after developing the
Bing search engine to strike back at Google, then Elop, who became president
of the group’s business division, has been cast as defender of the empire
that others — such as Google, Sun Microsystems or Salesforce — would love to
overthrow. “The fundamentals of Microsoft’s core business are being
challenged,” said Ben Wood, director of research at CCS Insight. “They need
to move quickly to shore up their position.”
Elop’s division has a lot to protect. Making a $12.4 billion (£7.5 billion)
profit on $18.9 billion of sales last year, it was Microsoft’s second-best
earner after its Windows arm.
On November 17, at a conference in Los Angeles, the company will give more
details of Azure, an operating system that will allow professional
developers to work on new online applications.
Next year there will be a greater break with the past when, for the first
time, Microsoft makes basic versions of its Word, Excel and PowerPoint
programs available free online, in part funded by advertising.
Microsoft Office 2010 will have a powerful new feature — SharePoint, an
application that allows numerous employees to work on a document
simultaneously from wherever they are in the world. It already has annual
sales of more than $1 billion and is growing at more than 10% a year.
Sensing SharePoint’s potential, Elop increased investment on it when he
arrived. “When something is hot you pour fuel on it,” he said.
Merrill Lynch estimated last year that the cloud computing market would be
worth $160 billion by 2011, with some $65 billion of that made up of online
advertising to subsidise the cost of free applications. Gartner, the IT
research firm, is slightly more conservative, forecasting the market will
almost triple by 2013 to $150 billion.
So far Microsoft has prospered in the cloud, attracting more than 1m paying
customers, including McDonald’s, the fast food giant, and Aviva, the
insurer. “When we look at paying customers, people who have said they are
going to commit financial resources to this, we have clearly established a
far greater traction than our competitors,” said Elop.
He believes this is because many customers favour a hybrid model of service,
rather than ditching their in-house servers on day one. Some, for example,
may want to run their headquarters IT themselves but put applications for
their shops or field workers in the cloud. Analysts agree.
“We are still far from the time when everything goes in the cloud,” said
Claudio Alvarez at GP Bullhound, a technology investment bank. “We need a
lot more bandwidth for that to happen.”
There are also security concerns to overcome. Elop used a flying visit to
London to meet a group of government chief information officers. Whichever
party wins the general election, they will probably be asked to reduce their
budgets — but, for several, hosting sensitive data remotely is a bar they
cannot yet climb over.
“We give people the power of choice,” said Elop, referring to Google’s
all-or-nothing approach. “We are not trying to drive a technology mandate.
We are not saying it’s all about the cloud.”
Nonetheless, competition is intense, and Microsoft has been rattled. Last week
it cut a third off the price it charges for hosting company e-mail accounts
from its own servers.
Google reports that 2m businesses are already using its applications. However,
it has fewer than 1m paying customers, and annual sales still total only
hundreds of millions of dollars. One client is Rentokil Initial, the
support-services company, which is switching 20,000 workers to Google’s
e-mail service and also adding on 15,000 mobile workers who did not
previously have access to e-mail.
“One of the most entrenched positions Microsoft has is in e-mail,” said Wood.
“How often is a business going to move from how it runs its e-mail service?
That is why there is such a land grab going on right now.”
The shift to cloud computing has not been without cost. Microsoft is investing
heavily to build some of the world’s largest data centres to host all its
customers’ data. A new centre in Dublin opened in September. Then there is
the cost of the electricity to power them all.
On the plus side, Elop believes Microsoft has the potential to grab more
spending per customer and so boost its overall profit.
Agatha Poon at Yankee Group, the technology consultancy, thinks its strength
should not be under-estimated. “With a ready-made ecosystem of developers,
Microsoft is in a good position to gain platform control,” she said. “It
will be interesting to see if Microsoft’s Azure platform will define the
future of corporate computing. Cloud-based service models will slowly but
surely impact enterprise IT strategy and transform the way enterprises
compete.”
Such changes are taking place against the backdrop of slowly recovering
business confidence as bosses start to make plans to spend again.
Elop’s definition of the “new normal” sounds less upbeat than the old normal.
“It means you are building on a lower base,” he said. “What none of us knows
is what this growth looks like going forward.” The mantra, not exclusive to
Microsoft, is to get customers to save money by investing more in technology.
Corporate IT providers must learn lessons from the consumer internet.
Microsoft’s push into unified communications — routing calls and instant
messages over both computers and mobiles — has followed the path set by
Skype, the internet phone pioneer.
As a result, more than half of Microsoft’s 90,000 employees no longer have
their own phone lines. They can check whether to call Elop at his laptop
from the colour of a dot that marks his online “presence” on their screens.
Elop singles out his 18-year-old son, who has just started university in his
native Canada, as exemplifying the pace of change. He communicates through
Facebook, Twitter, e-mail and text message. When he enters the world of work
in four years, the chances are that this palette will have evolved some more.
“When he asks for money, he always sends an e-mail so he can fit ‘I love you,
Dad’ at the bottom,” said Elop.
So it is no surprise that Microsoft, which already has about 400m users of its
Hotmail e-mail accounts, has picked up on trends from the consumer internet
and adapted them for business.
“The basic concepts are useful, but people don’t want to use Facebook to
design their next product,” Elop added.
Whether Microsoft will be quite so dominant when Elop junior receives his
first pay cheque remains to be seen. But the giant is not about to let its
market position evaporate into the cloud.
CLASH OF THE TECH TITANS
THE battle for supremacy between Microsoft and Google extends far beyond the
world of cloud computing.
The two technology giants are locking horns across a range of areas, from
mobile phones and online search advertising to operating systems.
Microsoft has gained ground on Google’s dominance of internet searches with
the launch of its new search engine, Bing, which will get a big marketing
push in Britain before Christmas.
Overall, Microsoft is still a bigger online property, according to figures
from Comscore. Its websites accounted for 14.5% of the 27 billion hours
spent online globally in September, led by the popularity of Windows Live
Messenger. Google accounted for 9.3%.
In mobile, Google’s Android handsets have performed strongly, and its Chrome
operating system poses a clear threat to Microsoft’s Windows software.
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