During a Palo Alto, California conference, Microsoft Corp’s chief software architect stated that the profit margins on online services, broadly called cloud computing, would likely yield a slimmer profit margin over the tech giant’s existing business software.
“The margins on services are not like the margins on software; it (cloud computing) will increase our profit and increase our revenue, but you will not have that margin,” said Ray Ozzie, the CEO of Microsoft.
Ozzie took over the Microsoft CEO position when Bill Gates retired from Microsoft to concentrate on managing the Bill and Melinda Gates Foundation. Since then, Microsoft has been slowly branching to online services, and the company will launch the Microsoft Azure platform later this year. Azure, itself, will allow developers to write applications using Microsoft’s cloud technology. Another cloud-based application from Microsoft is Live Mesh - which picks up from the idea of an online desktop and enables users to share files stored in their PCs.
“The margins at the low level, at the Azure level, are going to be lower than the top level, where you’re delivering a solution or something like Exchange,” said Ozzie. “You’re pricing that solution around a business value more than cost; so the margins are still very, very good.”
Traditionally, companies ran applications internally on their own servers, but cheaper devices, “ubiquitous high bandwidth,” and improving storage solutions gave architects the flexibility required to create “the right kind of user experience, and piece it up with the right thing delivered to the client, cached on the client, synchronized across clients, and the right piece of it in the cloud - bringing all those experiences together,” said Ozzie during a panel session with Wired magazine’s Steven Levy.
Observers believe that the popularity of cloud computing offered by Amazon.com, Google, and Salesforce.com could threaten the market position of Microsoft - whose applications are run on local systems. However, due to an increasingly competitive market, the company had to embrace cloud computing services, which the current chief software architect foresees will lower the company’s profit margins.
“The margins on services are not what the margins on software are; it [services] will increase our profit. It will increase our revenue. But you will not have that margin,” Ozzie said.
Microsoft’s profit margins from its boxed products, such as Windows operating systems, Office, and Exchange, have been historically high. The company is set to release its latest operating system in October of this year, called Windows 7.
During his panel interview with Levy, Ozzie noted that people pay for productivity, such as the productivity that derives from owning Microsoft Office. “When they buy Office, users will be doing editing, and looking at big desktop screens, because that is what Office is good for,” he said.
“But most of the world’s people, do not come together on the PC, they come together on the Web. And do a lot of sharing. You don’t create documents for yourself very often. You create them as a part of larger things. Consequently, the sharing scenarios and the collaboration scenarios are homed, and rooted on the Web,” he concluded.
