The Microsoft alliance with Dropbox puts Google at a disadvantage and shows how alliances are evolving on the cloud
Today’s announcement that Dropbox and Microsoft have deepened their alliance throws a further challenge out to Google’s ambitions to take a slice of the office productivity market while further reducing profits for the once dominant software giant.
Dropbox’s new deal with Microsoft give of users the ability to edit Office documents natively in their browser. It’s an advanced version of the feature that Google have offered with their Docs service for some years.
A notable aspect of this deal is how Dropbox have been prepared to partner with Microsoft – a decade ago smaller and relatively new companies were suspicious of working with Microsoft given the giant’s well deserved reputation for ruthless behaviour.
Equally Microsoft teaming with more agile newcomers rather than trying to bully them out of business is a distinct change from the company’s peak days under Bill Gates.
The real target of the alliance though is Google and the Dropbox-Microsoft deal makes Office 365 a far more formidable offering as a cloud service.
For Google the deal means they have to add more features to their Docs service to counter a more competitive Microsoft offering. It also shows the marketplace is shifting as alliances of convenience are forming.
Interestingly most of the case studies they cite involve customers moving from on premise servers onto cloud services.
While that’s very good advice as most customers, particularly small businesses, don’t have the capabilities it shows how the industry has shifted in the last twelve years.
For most of those companies a decade ago cloud service, or Software as a Service (SaaS) as it was known then, weren’t available for most business functions. Today they are the norm and usually the best option for smaller operations.
That shift to the cloud has meant an entire industry now faces extinction as the army of suburban IT service companies that once maintained those servers are now largely redundant.
As the clock ticks down on Windows 2003 server so too does it for all the businesses that once depended upon the PC industry.
Microsoft CEO Satya Nadella seeks to find a future for the company as it enters middle age.
One of the great business stories of today is how Microsoft is reinventing itself in the face of a totally changed industry. With the company turning 40, The Economist has a look at the business in its middle age.
The Economist concludes CEO Satya Nadella is making the important changes to the business that founder Bill Gates couldn’t make because he was too protective of the company’s core products and that Steve Ballmer, Nadella’s predecessor, wasn’t interested in making as he sweated the existing assets.
As this blog has pointed out before, The Economist notes the profit margins of the cloud and mobile services Nadella is focusing on are far slimmer than those Microsoft are used to from their server and desktop products.
Those fat profit margins were the reason why Nadella’s predecessors had little reason to refocus the company but towards the end of Ballmer’s leadership it was clear Microsoft couldn’t resist the shift for much longer.
Microsoft’s dilemma was clear to the stock market as well with The Economist having a chart showing the relative performance of IBM, Microsoft and Apple over the last 35 years.
When Microsoft peaked in the late 1990s, the company was worth over twenty percent of the total tech sector’s valuation – today Apple has stolen most of that value.
A particularly jarring from The Economist’s graph is just how much IBM dominated the tech sector a generation ago and its steep decline following the introduction of desktop computers.
IBM’s decline in its dotage is exactly the fate Nadella is trying to avoid for Microsoft, with companies like Google, Apple and Amazon as competitors he has a tough task ahead of him.
Thinner margins for cloud services mean no more fat commissions for IT salespeople
“All the pieces are now in place,” President of Google At Work, Amit Singh, tells Business Insider in an interview about how the company’s enterprise offerings are competing in the marketplace and, perhaps most critically, undermining Microsoft’s Office products.
While Singh may be confident about Google’s products, the company’s earnings from its cloud services are trivial compared to its competition.
‘Other’ categories
Google don’t break out their income from their apps services, instead lumping it into ‘other’ revenues which also includes Google Play, Apps Engine and all their other non-search products. In the last quarter that was $1.9 billion, barely 10% of the organisation’s entire income.
Microsoft also obscure their office software earnings having split its products into the Devices and Consumer licensing division and Commercial Licensing however the last quarter Office’s income was reported it was a seven billion dollar a quarter business.
While Microsoft’s income from the various forms of Office will have shrunk in the shift onto the cloud, it’s still safe to say it still dwarfs Google’s income from Apps.
Google’s ‘other’ category is also a general bucket of products that is competing against Microsoft Office, Amazon Web Services and Apple iTunes – with a combined total of 17 billion dollars, ten times Google’s quarterly income.
Slim pickings
Another problem for Google are the margins in its cloud services, as Microsoft have found the profits from online products are very slim compared to those from boxed software or advertising. For Google to continue its impressive profits, it’s going to have to find something more lucrative than cloud office software.
These slimmer margins also have another effect on the business model as Singh would know well from this days of working at Oracle.
Oracle, like many of the 1980s and 90s software companies, boasted extraordinary margins. This allowed them to pay huge commissions to salespeople, engineers and executives. A single enterprise sale for an Oracle, IBM or SAP salesdroid could pay for a decade of private school fees or a very nice yacht.
At Google and its partners the idea of being able to pay off the mortgage with the commissions from a single corporate deal raises a hollow laugh; there simply isn’t the money to pay for armies of hungry salesfolk.
Those thin margins also mean a change to Google and Microsoft’s business models. Shareholders expecting big profits from cloud services may need to be looking elsewhere.
Is it now the turn of the CIO to go the way of the tea lady
Once every workplace had a tea lady; usually a happy friendly woman who cheefully dispensed tea, buscuits and office gossip around an organisation.
During the 1980s the company tea lady vanished as companies cut costs and changing workplaces made the role redundant, is it now the turn of the CIO to go the way of the tea lady?
Yesterday research company company Frost and Sullivan hosted in a lunch in Sydney outlining their views on the growth of cloud computing based upon their 2014 State Of The Cloud report.
The report itself had few surprises with a forecast of the cloud market growing 30% each year over the next five years, a statistic that won’t surprise many watching how users are moving away from desktop applications.
Shifting procurement
One of the key trends though is how cloud services change the procurement process and lock IT managers and Chief Information Officers out of decision making. As the report says;
Half of all organisations feel that the decision making process is shifting from that of the CIO and IT department to the individual business unit for implementation or updates of cloud applications such as HR, payroll, collaboration and conferencing.
While the report puts a positive spin on what it describes as the “evolving role of IT within organisations”, Mark Dougan – Frost & Sullivan’s Managing Director for Australia and New Zealand – mentioned that often the decision to adopt a cloud service were made by executive management and then the CIO was told to implement the technology.
This illustrates how CIOs’ already tenuous grip on being a senior management role has slipped. With the rise of cloud services, it’s become easier for executives to make choices without considering the technological consequences.
Probably the business that best illustrates this shift has been Salesforce where many corporations find they have dozens of subscriptions being charged to sales managers’ credit cards, much to the chagrin of company accountants and IT managers. Salesforce and similar businesses have driven the trend so far that many consulting firms predict marketing departments will control more technology spending than IT managers in the near future.
That shift predates the coining of the word ‘cloud’, the term “port 80 and a credit card” was used to describe the Salesforce model of sales people signing up to what was then described as Software As A Service (SaaS) earlier in the century.
The electricity and railway industries remain huge employers and are essential to modern business but most for most companies the products are taken for granted – few companies have a Chief Electricity Officer sitting on their executive team despite power being an essential service.
For those IT managers hoping for a senior c-level position or even a seat on the board, the move to the cloud is terrible news. Rather than getting the corner office, the CIO could be heading the way of the tea lady.
Microsoft is making the shift to the cloud and devices, but those markets are turning out not to be profitable.
This morning Microsoft announced its quarterly results and, once again, they confirmed the company’s move into the cloud, a transition that means the company has to deal with reduced margins in once immensely profitable markets.
While Microsoft’s earnings beat analyst estimates, the stock still dropped on out of hours trading on the US markets. The reason being margins showed a slight decline and the impending release of Windows 10, which will be free for customers upgrading, portends a further fall in income.
The fading of Windows is best shown in the results for the company’s Devices and Consumer licensing division which covers licensing of the operating system and is the second biggest contributor to Microsoft’s revenues and profits. The segment’s takings are slowly declining although surprisingly the division’s margins are standing up.
Microsoft division performance 2014-15
Windows’ decline shows the post XP recovery Microsoft was hoping for the division has failed to materialise beyond a bump last quarter, as the company explained in its media release;
Windows OEM Pro revenue declined 13%; revenue was impacted by the business PC market and Pro mix returning to pre-Windows XP end of support levels and by new lower-priced licenses for devices sold to academic customers
With company making various versions of Windows 8 and 10 free, it’s hard to see the division doing anything but accelerating its decline as fewer people actually pay for the operating system.
Fading margins
Also illustrating Windows’ falling fortunes is how the Computer and Gaming Hardware division’s revenue threatens to overtake the Devices and Consumer Licensing group’s contribution. The problem for Microsoft with this that the manufacture of Xboxes and Surface tablets only boasts a profit margin of 12% against consumer licensing’s 93%.
Last week at its preview of Windows 10 Microsoft showcased its HoloLens virtual reality technology, while impressive it’s unlikely to boast margins any better than Xbox consoles or Surface tablets. At best it will be a trivial contribution to the company’s bottom line.
Microsoft Margins by operating segment
Percentage margins
Q1-14
Q2-14
Q3-14
Q4-14
Q1-15
Q2-15
Devices and Consumer Licensing
87%
90%
87%
92%
93%
93%
Computing and Gaming Hardware
15%
9%
14%
1%
20%
12%
Phone Hardware
n/a
n/a
n/a
3%
18%
14%
Devices and Consumer Other
21%
21%
21%
17%
17%
23%
Commercial Licensing
92%
92%
91%
92%
92%
93%
Commercial Other
17%
23%
25%
31%
33%
35%
Dwarfing both divisions in both revenue and profit is the Commercial Licensing segment which also boasts fat margins of 93% and accounts for nearly half the money coming into the organisation. Commercial Licensing remains static and provides the bedrock for the company’s cashflow.
The big growth area remains the cloud with the Other Commercial division, which includes most of the online and professional services growing steadily. While showing growth, this part of the business boasts a relatively low margin of 33% so any market moves from Enterprise licensing to the cloud will have a sharp effect on the company’s bottom line.
Mobile black holes
Of all Microsoft’s divisions, the problem remains the Phone Hardware segment with low margins, declining sales and a shrinking market share. Reports released overnight indicate that over a third of Lumia devices sold are not being activated which may indicate distribution channels are having to deal with unsold stock.
Compounding Microsoft’s poor position in the phone marketplace is the resurgence of Apple’s iPhone, particularly in the Chinese market where Microsoft is failing dismally. Global market share figures are indicating Apple may soon overtake Samsung as the world’s largest smartphone vendor while Android systems are coming to dominate the global marketplace.
Tomorrow Apple will announce their results and we’ll see how the two companies are travelling, the contrasts will almost certainly be striking. For Microsoft, even if they do manage a shift to mobility and the cloud, they are unlikely to repeat Apple’s success in reinventing themselves.
How much can we trust technology? A World Economic Forum panel discusses the issues.
“There is a big problem with trust today,” says cable operator Liberty Global’s Micheal T. Fries.
He was sitting on a fascinating panel at the World Economic Forum this week with Yahoo! CEO Marissa Mayer, Salesforce founder Marc Benioff and World Wide Web creator Tim Berners-Lee looks at the issue of trust in the tech world.
In a world where everyone wants access to our data, it’s a pertinent and timely discussion from people at the front line of where these issues of ethics and privacy are being dealt with.
