Microsoft Shifting to Cloud Computing Strategy

By Reuters  |  Posted 05-19-2008

Microsoft sees tens of millions of corporate e-mail accounts moving to its data centers over the next five years, shifting to a business model that may thin profit margins but generate more revenue.

In an interview ahead of the Reuters Global Technology, Media and Telecoms Summit, Chris Capossela, who manages Microsoft's Office products, said the company will see more and more companies abandon their own in-house computer systems and shift to "cloud computing," a less expensive alternative.

Cloud computing is the trend by Internet powerhouses to array huge numbers of computers in centralized data centers to deliver Web-based applications to far-flung users.

Microsoft built its business selling software to run on local machines, both computer servers and personal computers, but, in recent years, it has invested billions of dollars in massive data centers, which are the basic infrastructure for a wide range of Web services.

It has started offering corporate customers the option of having Microsoft run their e-mail, collaboration or sales programs on the software giant's computers and delivering those applications over the Web as a monthly subscription service.

Capossela, a senior vice president at Microsoft, said it plans to be "agnostic" by offering customers the choice between a traditional licensing model or a subscription-based service model embraced by rivals like Salesforce.com and Google.

"That's where we think we are far stronger than our service-religious competition who think it's all going to be in the cloud," he said. "A lot of companies are not ready to take their money out of the pillowcase and put it in the bank."

Exchange Online, the service offering for its Exchange mail and messaging server software, will be the primary application adopted by corporate customers, according to Capossela.

"In five years, 50 percent of our Exchange mailboxes will be Exchange Online," said Capossela, who expects a portion of Exchange Online customers to come from customers switching from IBM's Lotus Domino system.

According to research firm Radicati, Exchange will run about 210 million corporate e-mail accounts in 2008, growing to 319 million mailboxes in 2012.

In the Clouds

The shift to cloud computing will introduce some changes, according to Capossela, in the earnings model at Microsoft's business division, which generated revenue of $16.4 billion and operating profit of $10.8 billion in fiscal 2007.

Currently, customers pay Microsoft a licensing fee for the software, then buy their own computer and hire their own technology staff to manage those systems.

In a services business, the customer will pay Microsoft a larger fee, since Microsoft also runs and maintains all the hardware. But Microsoft's profit margins may not be "as high," Capossela said, even though revenue may be more consistent.

The key for Microsoft will be to run its computers systems as efficiently as possible to reduce hardware costs.

"That's where we make the business model work," said Capossela, 38, who worked in his earlier years at the company as a speech writing assistant for co-founder Bill Gates.

Microsoft has already signed up large customers to its online services. The company said Coca Cola Enterprises Inc (CCE.N: Quote, Profile, Research) signed up 70,000 seats for Exchange Online, switching over from IBM's Lotus Domino system.

Redmond, Washington-based Microsoft said it continues to build up its infrastructure, adding roughly 10,000 powerful computer servers a month to its data centers.

It's a staggering amount of computing power, about the equivalent what popular social networking site Facebook uses, according to Capossela.