How Microsoft's cloud evolution is dissolving the separation between enterprise and consumer

How Microsoft's cloud evolution is dissolving the separation between enterprise and consumer

Summary: Picking apart Microsoft's latest financials shows you can't split the company neatly between home and business any more, thanks to the cloud.

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A little while back there were predictions that, while Microsoft might continue to succeed in the enterprise market where it has multiple billion-dollar businesses, it would lose out on the consumer side to Apple and Google.

So does the 'collapsing' PC market mean that's finally happening? Not necessarily.

As Simon Bisson pointed out recently, PC sales are dropping not just because people are buying cheaper tablets that can do some of what a PC does, but because the PC they already has is good enough and they don't need a new one nearly as often.

Consumers haven't stopped needing those PCs, even if they use them less and use other devices more. Or, as analyst Rob Enderle put it recently: "PCs aren't being replaced by alien devices, rather, they are evolving into devices that are smaller, portable, and increasingly pull their performance from servers."

The merging of consumer and enterprise

There's also less difference between 'consumer' and 'enterprise' than there used to be (and not just because of the use of consumer devices and services in the office).

Businesses and home users both care about connectivity and uptime, because if my DSL or my cloud provider goes down then I haven't got my email, my photos or my business applications any more. They're both buying into services more than products: Office 365, subscriptions to Office Home Premium or extra space on Google Drive, for example.

Yes, the specific services a business and a home user buy will be different and have different features — and the service the home user gets might be free because companies can sell ads on it, or because it's a loss leader to tie them in to a broader ecosystem. Equally, consumer services often don't have extra features businesses need: I would prefer users in my office to put files on SharePoint Online or Box instead of Dropbox. But that's more about how well you understand your market; increasingly, the skills companies need to build and run those services are similar, and the way to make money from them is to have both efficiency and scale.

Devices and services

Describing yourself as an enterprise supplier or a consumer supplier used to mean you build products on very different platforms. Increasingly, the platform you build anything on is a cloud platform. For Microsoft, that's the services side of "devices and services" — and the experience it has in running the datacentres those services live in.

Microsoft's latest set of accounts include some interesting numbers around both.

On the devices side, CFO Peter Klein suggested on the earnings call that the days of buying a new PC because you'd had your old one for three or five years are probably gone, for businesses and consumers alike. Instead, you'll buy a new PC because it has a new feature you specifically need or a new form factor you really want, like a touchscreen or a detachable keyboard.

That keeps Microsoft held hostage to OEMs building new and interesting PCs — or the Surface team managing to build and sell enough devices to make up the difference.

We haven't been able to find out how much Microsoft made from Surface and the reason Windows had a better quarter than the PC market in general might just be the mix of selling Windows upgrades and selling multiyear licences to businesses. This combination of Surface, Windows 8 upgrades and Windows business licences adds up to a 40 percent increase in the revenue the Windows division makes that doesn't come from PC makers.

But the growth in the Office and Server and Tools groups comes at least in part from subscriptions to Office 365 and Azure. 

"We are starting to get scale in cloud services. Growth in Office 365 is coming at a higher margin and Office 365 is really starting to get scale." He predicted Office subscriptions will be a good future business. "In the long term it's a great trend because we're building up a banked book of business on the subscription side that will become less and less connected to the PC market," Klein said.

Eventually, Apple App Store terms permitting, that will probably include subscriptions from Android and iPad tablet users. How will you tell the home and work users apart in that?

And on the consumer side, what about that 56 percent annual increase in revenue from the Entertainment and Devices division?

Month after month, Xbox outsells the PlayStation and Wii but, while it's selling more than other consoles, that's an increasingly large slice of an increasingly smaller pie: the 1.3 million consoles sold in the last year is a drop in sales of nine percent. Xbox Live membership, however, is up 18 percent to 46 million users — and revenue from transactions on Xbox Live (like buying games or renting movies or subscribing to music services) is up twice that, at 36 percent.

The 56 percent increase in Skype calls in the last quarter, to 161 billion call minutes, doesn't hurt either. That means Microsoft has built a very profitable services business on top of a good device business (which should bode well for sales of whatever the next Xbox turns out to be).

Merging Skype and Windows Messaging isn't making everyone happy (we've seen colleagues complaining about not getting chat messages for hours or days after they were sent) but Skype continues to be a huge business and a great buy for Microsoft.

Revenue for the business communications service Lync is up 30 percent. That's an example of services that are very different for businesses and home users, but that both rely on the same Microsoft networks and cloud expertise in the background.

Microsoft is not just Windows (or Office, or Surface or Windows Phone, or Bing). Microsoft has a lot of places to make money.

And no, those aren't all enterprise businesses, and no, Microsoft isn't out of the consumer market.

But with the way the industry is changing, having a foot in both the consumer and the business market might be the best way to win in future, because it's getting increasingly hard to tell them apart by what it takes to build a service for each of them.

Topics: Cloud, Enterprise Software, Microsoft

Mary Branscombe

About Mary Branscombe

Mary Branscombe is a freelance tech journalist. Mary has been a technology writer for nearly two decades, covering everything from early versions of Windows and Office to the first smartphones, the arrival of the web and most things inbetween.

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18 comments
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  • Microsoft is not just Windows

    'Microsoft is not just Windows (or Office, or Surface or Windows Phone, or Bing). Microsoft has a lot of places to make money.'

    A lot of people can swallow that little piece of rock....before they pretend Microsoft is about to die.
    Dreyer Smit
    • As Father Jack Hackett would say

      FeckI post is Feck!
      sonnet37
  • I don't get the point of a Windows phone

    Windows dominates on PSs. Microsoft looks good there. Why are the making a cell phone OS. The PC OS king is embarrassing itself with these toy OSs. IBM has got mainframes. Microsoft got PSs. Apple and Google got cell phones. So what the PS market is shrinking. It happens. It won't go away.
    Tim Jordan
    • Toy?

      There is nothing the least bit embarrassing about Windows Phone. It rocks. Microsoft must be relevant in the mobile space to support its dominance on the desktop. Microsoft has made any number of mistakes in the development, delivery and marketing of their mobile products (Windows Phone and Windows RT), but the strategy of going "all-in" on mobile was not just the right strategy, it was the only strategy.
      FDanconia
      • Muddled

        Unfortunately for MS, I can do more with Android than I can with Win phone and RT. I still use a pc (several in fact). It is more a design issue that my pc tasks (home and work) do not translate well into a Win phone/RT world. As for my social world, Android is a much better fit than Win.

        MS is still missing something. As this tech evolution progresses, I find MS is staying confined into the pc/xBox corral they have always existed in. Their current offering does not perform as well, nor fit, as their competitors.
        rhonin
        • More with Android?

          I find it shocking that you say you can do more with Android than with RT. While I dislike RT in principle (because it's an artificial limitation, not a limitation of the weaker chipsets like originally claimed), I find that Android is little more than a toy, whereas RT is far, far, far more effective and resourceful.

          WP8, however, is more on par with Android since they are both small device OSes, but I find the reliability and speed of WP8 to give it the edge. Android on every device I've had (several phones, couple tablets) have been sluggish, buggy, and crash regularly (although mostly with HTC products, which I blame on their shell, but it is not confined to HTC products). I have never had anything crash on WP8, and it's remained snappy, although I've used it far less than Android so far. Still, all of my Android devices have been sluggish even when they were recently released, top of the line, mere days old. I just find actual use of Android devices to be the most frustrating thing in the world.

          Android is just too dumbed down to be an efficient OS. It's fine for browsing the web and playing simple games/watching videos, but beyond that, having tried to use it for actual work, I can't agree that it is in any way more effective than any Windows device of any kind. If anything, Android and WP8 are on more or less on par in that regard, and Android is far, far behind WinRT (which is itself far behind Win8).

          I do, however, agree that MS isn't taking bold enough steps to stay relevant in the mobile tech evolution. Being too afraid to upset OEMs is going to continue to put them at risk.
          Phillip Baggett
          • Afraid of the OEMs and consumers too

            Browse the World Wide Web and you'll find tons of software that you can download and install. None of which runs on Windows RT! If Microsoft were to make a bold move and force everybody to move to RT, they'll bolt.

            Microsoft has to carry it's base with them. Maybe one or two guys will buy RT but it will be decades before Microsoft can just drop support for regular Windows.
            Tim Jordan
  • Windows 8 combines all these services.

    I'm happy with Windows 8's integration with all of these services, I can access both my business services (e-mail, SkyDrive, ''''other'' ;cloud''s,',', oifds Hotmail, Outlook, Calendar (for meetings)) and personal/consumer (like Windows Live's many services for costumization, and Xbox LIVE). Putting all these services into 1 place is a great way of showing your consumers that you mean business in many different services.

    I don't get the criticism towards Microsoft Security Essentials' integration into Windows 8 as Windows Defender, because it sets a bar, it says to the A.V.-world, we want you to perform better, we challenge you to make Windows virus-free (and I haven't encountered a single virus on my W8).

    Windows Live Family Safety has been made a component of Windows because giving people the option of having services is inferior to challenging them to find better services. For every app Microsoft offers it's telling us to make better apps.
    Văn Minh Nguyễn
  • SkyDrive integration for Windows XP, Vista and 7.

    Microsoft must offer SkyDrive's ability to put P.C. settings and entire systems ''into the Cloud'' as it offers on Windows Phone 8 and in the future on Windows 8.1, because this would make it easier to move all your files from XP to Windows 8. XP is still supported, and they could easily give people this via Windows Update, this would make the transition easier, and also combines Windows Tablet-P.C.'s, Windows Phone and P.C.'s into 1 Cloud without all the hassle we had pre-8.
    Văn Minh Nguyễn
  • True

    All my customers are not upgrading to a new PC, because Windows 8 is a failed system. I tell them if it isn't broke don't fix it and that is an old cliche, but its factual. Innovation at Microsoft is one reason why Microsoft is in decline and the other is Steve Ballmer. Until Ballmer retires or is fired don't expect much from Microsoft.
    dcowsky@...
    • you have funny way of seeing things

      Microsoft keeps posting record earnings quarter after quarter, despite declining PC marker and the EU fine. yet it looks in a decline to you
      vpupkin
      • Steve Ballmer became CEO January 1, 2000

        In 1995 Microsoft stock was worth $5 per share. In 2000 when Bill Gates gave the job to Steve Ballmer the stock was worth $60 per share. In two years after Steve Ballmer took over the stock was worth half of what it was worth when Ballmer took over and is still roughly at that price today.
        Tim Jordan
        • Stock Market

          How does that compare with the stock market in general? Or are you saying Stever Balmer is the cause of the total stock market slump?
          Webminotaur
        • Way too ignorant there, Tim.

          Like the guy just below you stated, the stock market is what dictates the price of a company's stock. Apple's stock wasn't doing too great after the stock market crash in 2000-2001, and still wasn't too healthy before that other crash in 2007-2008. The iDevices are what rescued Apple.

          When it comes to a more secure outlook, or a better future, I would put my money on the stock of a hugely diversified company, like MS, than on a company which only has, basically, one product, that being the iOS device(s), where iPhone and iPads are basically the same, but with different sizes. Google is a one-trick pony, that horse being search. The next stock market crash will bring down Google and Apple, quicker than it would Microsoft. Ballmer, no matter how anyone feels about him, has brought MS to being the best computer technology company around, with so much diversification that, it's going to be next to impossible to bring it down.
          adornoe
  • How Microsoft's cloud evolution is dissolving the separation between enterp

    Given this information Microsoft is on the right track. People can see Microsoft as this all in one solution for enterprise or home. They don't need to know whats business and what is not, that is for Microsoft to do behind the scenes. Having a diverse set of services is working out quite well for them.
    Loverock-Davidson
  • Microsoft can break down the walls

    The cloud is disruptive because it not only cuts across market and application segments, but because it removes arbitrary geographic boundaries and has profound implications on service layers. MSFT should use it's assets to disrupt the telecom/broadband stack if it wants to survive. Grow 90% base while sacrificing 10% base. Math isn't tough.
    InfoStack
  • Big Thresholds

    The next big threshold is video and 3D. Not the limp video we have now but HD quality video in real time. That will take a major jump in both hardware and web speeds not mention software to support it. After that comes 3D which is another major jump. Each of these requires passing data that far outstrips current abilities. Are these things really needed? Until then what we have is good enough. Microsoft can thrive in a good enough market with subscription licensing but not life time purchases.
    MichaelInMA
  • Disruptive Cloud?

    If CISPA is finally passed into law, I am guessing that people will find that reason enough to avoid the cloud.
    Olorin_z