Microsoft commercial cloud, Azure vs. Amazon Web Services is nice storyline, but misguided comparison

Microsoft Azure vs. AWS is a fun comparison, but Microsoft's commercial cloud is more akin to Oracle and Salesforce.

One storyline following earnings from Microsoft and Amazon revolved around pitting Azure vs. Amazon Web Services, but the comparison falls apart based on product portfolio.

Why? First, Microsoft's commercial cloud and AWS are apples and oranges. Second, Microsoft's commercial cloud is more akin to Salesforce and Oracle or even Google than AWS. And finally, Microsoft Azure vs. AWS isn't zero sum because the cloud pie is large enough for both.

Now we all know the tech industry loves its zero sum storylines, but don't get distracted. Microsoft said that its commercial cloud annual run rate is north of $20 billion now. AWS is on an annual run rate of $18 billion.

Here's the catch. Microsoft's commercial cloud business is driven by Office 365. Microsoft's commercial cloud rollup also includes Azure; Office 365 business services (Exchange Online, SharePoint Online, Skype for Business Online, Microsoft Teams); Dynamics 365; and its Enterprise Mobility + Security Suite (EMS).

Microsoft Office 365 now has 120 million business users

Microsoft doesn't disclose Azure revenue in its quarterly results, but has started to break out commercial cloud sales.

msft-commercial-cloud-revenue-q1-2018.png

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Jefferies analyst John DiFucci estimates that Azure by itself has an annual revenue run rate of $5.4 billion.

DiFucci wrote in a research note:

We believe the majority of Commercial Cloud is Office 365, a large part of which is not really a Cloud business. The Exchange, SharePoint, Lync, and OneDrive components of Office 365 are Cloud services, but the Productivity Suite that everyone has is very similar, if not exactly like Office on-premise (perhaps with automated updates on). As such, gross margins of this important part (if not the majority) of Office 365 are probably 90% or more - which means the gross margins of the rest are probably significantly lower than the reported 57%. We do not believe that Microsoft ever realizes the same margin profile as AWS at the same scale given operational and cultural differences.

My markup of Amazon's most recent quarter highlights the margin power. Amazon's profits come from AWS.

aws-q3-mark-up.png

AWS is more infrastructure- and platform-as-service, but is moving up the stack with its own database. Cue the Oracle obsession with AWS.

In the future, Microsoft and AWS may be direct competitors, but today Microsoft is generally a software-as-a-service company with fast-growing IaaS.

Add it up and Microsoft's commercial cloud is more comparable to Oracle and Salesforce than AWS. Even Google Cloud, which is carried by G Suite, is a better comparison.

Google doesn't disclose much about its cloud business and the "other" revenue line is muddled by Google Play and hardware. Cisco, Google Cloud forge hybrid cloud partnership: Here's why they need each other | Without better partner skills, Google can't compete in the cloud

As for Oracle, its cloud revenue has an annual run rate of $5.87 billion as of its most recent quarter. In fiscal 2017, $3.21 billion of cloud revenue was software-as-a-service with platform- and infrastructure-as-a-service adding $1.36 billion for a total of $4.57 billion.

Stacking up the cloud vendors: AWS vs. Microsoft Azure, IBM, Google, Oracle

Surely, If DiFucci's Azure revenue run rate estimate is correct it's roughly the same size as Oracle's total cloud business. The mix between Oracle's cloud business and Microsoft's commercial cloud are similar. Twenty-nine percent of Oracle's cloud business is IaaS and PaaS. IaaS accounts for about a quarter of Microsoft's commercial cloud revenue.

Salesforce doesn't dabble with infrastructure (it partners with AWS instead) so is purely SaaS. Wall Street is expecting fiscal 2018 (January) revenue of $10.4 billion.

Microsoft's commercial cloud business is twice the size of Salesforce roughly speaking.

IBM is another player that quotes an as-a-service run rate. As of Sept. 30, IBM's as-a-service run rate is $9.4 billion. Note that much of that run rate is attributed to SaaS, but the breakouts are unclear.

Bottom line: Comparisons of the cloud vendors are increasingly tricky, but the AWS-Microsoft Azure duel may be among the hardest to read.

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