Microsoft Reveals Its Cloud Business Strategy
|May 18, 2012||Posted by admin||
A few days ago, Microsoft published The Economics of the Cloud, a whitepaper that has so far not gotten nearly as much attention or consideration as it deserves.Â Perhaps this indifference is due to a collective freshman flashback on the dreaded “Econ 101″ or, to skepticism about Microsoft’s importance in the new world of cloud computing.Â Either way, it is unfortunate because the paper presents some startling new data about the cloud, and, not entirely intentionally, reveals the company’s cloud strategy at a level of nuance that we have not seen before.
The paper is by Rolf Harms and Michael Yamartino, a director and manager, respectively, in Microsoft’s Corporate Strategy Group.Â The paper is pointed at “IT leaders”, a phrase used 16 times in 22 pages, and has the ostensible goals of sharing the cloud wisdom Microsoft has gained from doing Azure, Bing, Windows Live, and Office 365, and of sharing data gathered and conclusions drawn by Microsoft about the future of cloud computing from modeling done in its Strategy Department.
The numerical data in the report and what the researchers make of it are quite interesting in their own right, but, when calibrated, Da Vinci Code style with the company’s history and recent activities, they may reveal a bit more than the authors intended.Â In any case, neither Ray Ozzie’s dreamy “Dawn of a New Day” farewell memo nor Steve Ballmer’s buzzy “All In” UW speech and internal memo helped us see this coming.
I admit it, until this whitepaper, I was one of those who took the “All In” stuff for opportunistic hyperbole and simply did not believe Ballmer when he said in his memo, “We need to be (and are) willing to change our business models to take advantage of the cloud.”Â Yeah, given what the cloud will do to the licensed software business, he should be saying that.Â But, a company that big and successful changing its business model seemed impossible.Â In short, I thought the cloud would turn Microsoft into the world’s biggest dairy farm.Â Now, I am not so sure.
Biggest is Bestest
The intended takeaways from the paper are summarized like this:
“Private clouds address many of the concerns IT leaders have about cloud computing, and so they may be perfectly suited for certain situations.Â Â But because of their limited ability to take advantage of demand-side economies of scale and multi-tenancy, we believe that private clouds may one day carry a cost that is as much as 10x the cost of public clouds.”
“Based on our analysis, we see a long-term shift to cloud driven by three important economies of scale: (1) larger datacenters can deploy computational resources at significantly lower cost than smaller ones; (2) demand pooling improves the utilization of these resources, especially in public clouds; and (3) multi-tenancy lowers application maintenance labor costs for large public clouds. Finally, the cloud offers unparalleled levels of elasticity and agility that will enable exciting new solutions and applications.”
They are saying that the private cloud will be a niche business for them and a costly specialty for customers – the future is all about big public clouds, due to their dramatic economies of scale gained through lower infrastructure costs, higher utilization, and multi-tenancy cost amortization.
Microsoft must be changing to a new business model, because those things are all bad for their old one.Â Today they make most of their money from dedicated servers, desktop software, and single-user and single-tenant applications.
Supply, Demand, and Multi-Tenancy
The supply-side economies of scale gained through big public clouds highlighted in the paper are:
- Lower power costs through strategic power grid location and bulk purchasing
- Lower labor costs from fewer employees managing more servers and apps.
- Higher security and reliability due to provider expertise and infrastructure quality
- Higher buying power from high volumes of a few standardized configurations
The demand-side economies of scale are gained through optimizing infrastructure utilization in these five areas:
- Randomness of end-user access
- Time of day patterns for applications
- Industry-specific variability
- Multi-resource variability
- Uncertain growth patterns
- About these factors, the paper says,
“A key economic advantage of the cloud is its ability to address variability in resource utilization brought on by these factors. By pooling resources, variability is diversified away, evening out utilization patterns. The larger the pool of resources, the smoother the aggregate demand profile, the higher the overall utilization rate, and the cheaper and more efficiently the IT organization can meet its end-user demands.”
In other words, the bigger the cloud, the more the users, and the more diverse the applications, the greater the economies of scale on the demand (customer/user) side will be.
Finally, the report breaks out the multi-tenancy economies of scale like this:
- Fixed application labor amortized over a large number of customers.
- Fixed component of server utilization amortized over large number of customers.
The whitepaper elaborates on these factors in great detail to make a compelling case for big clouds and then goes on at length to impugn the private cloud and provide reassurance that the common IT concerns of security and compliance about the public cloud would soon be non-issues.