Can Cloud Computing Be Bad For Microsoft?

Can Cloud Computing Be Bad

Microsoft and Cloud Computing share a strange relationship. On one hand, Cloud Computing threatens Microsoft’s dominance in the personal computing space through its Windows OS and Office suite; on the other hand, Microsoft accepts the inevitable progress of Cloud Computing and is investing considerable resources in that space – some may even argue, a bit too much (See: Is Microsoft Taking A Risk By Putting All Its Eggs In The Cloud Computing Basket?). Now, analysts have started asking questions whether cloud computing can be bad for Microsoft’s bottom line.

According to Goldman Sachs analyst Heather Bellini speaking to Bloomberg, lower profit margins in cloud computing will adversely affect the company’s overall bottom line. This view is seconded by Jason Maynard from Wells Fargo Securities who said that Microsoft may not be able to produce outsized margins like before. “Nothing will ever be as high as the old model,” Maynard said.

Forbes has laid out Microsoft’s problem clearly in its feature titled Cloud Could Rain On Microsoft’s Profit Parade. “Microsoft has traditionally enjoyed very high operating profit margins on its enterprise software products like the Office suite as the incremental costs of producing one more copy of the software are very low. However, hosting software on servers in its data centers and offering it over the cloud is more expensive than simply selling packaged software as it incurs operating cost throughout the usage period,” it says.

Moreover, it’s not only cloud computing that’s hurting Microsoft’s margins. The company’s bestselling X-Box gaming consoles, though bringing in revenue dollars, are considerably more expensive to manufacture than software, thereby affecting profitability. Thus, although top line growth is happening, the bottom line has been taking a beating, and will continue to in the foreseeable future. Only if Microsoft manages to get more customers for its cloud computing offerings can it generate economies of scale to improve margins.

Now, we come back to the question posed in the title of this article: can cloud computing be bad for Microsoft? If we consider that the technology is affecting the company’s stranglehold on enterprise software, then it certainly is. However, that does not mean that Microsoft wash its hands off cloud computing. If it did, it may very well end up as the Kodak of its age. Even with the reduced profit margins, it makes sense to have a prominent presence in cloud computing. After all, a smaller share of a growing pie is better than a larger share of a shrinking one. This has resulted in Microsoft becoming, as I stated in an earlier article, “Cloud Computing’s Unlikeliest Supporter”.

By Sourya Biswas

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