Microsoft Corporation: Cloud Migration Ups Server Revenue

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Investors have been debating how much Microsoft Corporation (NASDAQ:MSFT)’s Server business will be hurt as enterprise customers shift to cloud computing. Bernstein analysts say, however, that the reverse is true. Their estimates suggest a 1% to 5% in total revenue from Windows Server software if only 10% of Windows Server customers move to the company’s mid-range Azure platform-as-a-service.

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Microsoft Cloud Migration

Cloud migration is good for Microsoft

In a research note dated Nov. 25, 2014, analysts Mark Moerdler and Zhe Shen note that much of Wall Street expects the shift to cloud computing to significantly damage Microsoft’s Server revenue. Cloud services have lower margins, so shifting an increase in Cloud revenue may not be enough to offset expected declines in Server revenue. Or will they?

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The Bernstein team sets forth a scenario suggesting that Microsoft will actually do better as enterprise customers shift to the cloud. They say that a customer running Windows Server on-site creates $1,414 in revenue for Microsoft over five years. That includes $883 for the Server license and assumes half of customers buy the optional $220 per year optional maintenance service.

If the customer shifts the same amount of computing power to the cloud, the Bernstein team states that Microsoft could see “significant revenue uplift,” even if the customer uses a competitor’s cloud infrastructure like Amazon.com, Inc. (NASDAQ:AMZN)’s Web Services.

How much could Microsoft benefit?

According to the analysts, in the scenario above, Microsoft could see a 38% revenue increase if just a single Windows Server instance is moved to run on infrastructure-as-a-service. They estimate $1,964 in revenue, a 38% increase over five years as customer shift to most vendors. The reason for this is because they believe customers running Windows Server on the cloud must buy the maintenance plan from Microsoft.

If a customer shifts from Windows Server to Microsoft Azure, they estimate an 87% increase in revenue. They project $2,630 in revenue over five years from customers who shift to the Azure platform-as-a-service. That includes $526 per year in subscription fees over five years.

The analysts say the five-year cumulative increase in Server license revenue could go as high as 1,300%, depending on what type of server an enterprise customer is running in the cloud.

 

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2 COMMENTS

  1. This is based on a misunderstanding of Microsoft licensing.
    Normally, when customers move their own licenses to the cloud they need Software Assurance (SA). This gives them a right called License Mobility through SA, and that’s the maintenance plan that Moerdler and Shen are saying customers must buy for Windows Server.
    Here’s the catch: Windows Server is the only server that NEVER has License Mobility, even if you purchase the maintenance plan.
    Customers who move other server workloads to the cloud, such as for email (Exchange) or collaboration (SharePoint), must purchase SA for the Exchange and SharePoint licenses they move to the cloud, but they can’t move their own Windows licenses there. They must purchase Windows server from the hosting organization, such as AWS or from Microsoft if they are using Azure.
    So the revenue stream that Moerdler and Shen are talking about doesn’t exist.
    Moving Microsoft workloads to the cloud probably won’t generate more server revenue for Microsoft
    Hosters who provide Windows Server for such workloads pay a fee to Microsoft, but that fee is generally priced to equal the full license cost of the product after three years of rental. For Windows server that would be total revenue to Microsoft of only $883 every three years. And some of these hosters, such as AWS, may have deals with Microsoft that are heavily discounted from that.

  2. My opinion too – cloud computing is less efficient than local, requires more of everything. Also encourages much larger projects that again, require more of everything.

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