Microsoft is on a quest to move more of its cloud services to Azure

Microsoft is looking to move more -- and maybe even 'all' -- of its first-party services, like Office 365, Bing and Xbox Live to Azure. Here's why and what this may mean for the company.
Written by Mary Jo Foley, Senior Contributing Editor

On any Microsoft earnings day, Wall Street analysts are focused almost entirely on the Microsoft's cloud. Hence, it's a good time to attempt to define again what Microsoft means when it says "cloud."


On the company's quarterly earnings calls, Microsoft officials talk a lot about "the intelligent cloud." In that bucket, Microsoft includes revenues from Azure (public cloud), private and hybrid server products and services. This bucket is largely products and services under the Cloud & Enterprise domain, many of which aren't technically cloud at all, like Windows Server, SQL Server, System Center, Azure, and Enterprise Services.

In its fiscal 2016 third quarter, Microsoft execs said its intelligent cloud segment hit $6.1 billion, up 3.3 percent from the same year-ago quarter. (The Office 365 consumer and business services aren't included at all in the intelligent cloud number; they're under Productivity and Business Processes.)

The "commercial cloud" -- the part of Microsoft's business that officials are expecting to collectively hit a $20 billion annual run rate during Microsoft's fiscal 2018, includes revenues from Azure; its Office 365 business services (Exchange Online, SharePoint Online, Skype for Business Online); Dynamics CRM Online and its Enterprise Mobility Suite (EMS). No on-premises server, cloud hosting or other consulting services are in this bucket.

As of its fiscal 2016 third quarter, Microsoft officials said the company's commercial cloud run rate was at $10 billion annually. Officials reiterated today that the company is on track to hit its $20 billion run rate goal.

To make things even more confusing, not everything in the commercial cloud bucket runs on Azure. A number of Microsoft's own services -- including Office 365 business, Office 365 consumer, Bing and Xbox Live -- are not running on its Azure cloud backbone. They are still running on their own custom stacks and datacenters.

Certain, newer pieces of some of these services, such as the Azure Active Directory service at the heart of Office 365 and some of the newer, complementary Xbox Live services are hosted on Azure. But the core Bing, Office 365 Commercial and Consumer offerings and Xbox Live services are not hosted on Azure.

However, this may not be the case forever, if Microsoft management has its way. There's a plan in place to move all of Microsoft's key services to run on Azure.

We already knew that Microsoft's long-term plan, first discussed in 2011, if not before, was to move Office 365 to Azure. But from what I'd been told, there were some Microsoft services like Bing and Xbox Live that would likely never move to Azure, as they were considered "legacy." There was no business case for moving them to Azure, I was told.

It seems that thinking has changed. I recently found a job posting on Microsoft's site that indicates there's an initiative inside the company to bring all these services over to Azure. Microsoft is using the word "cloudoptimal" to mean "all of Microsoft's services run best on Azure, and Azure becomes the world's best cloud."

Here's the description of the company's plan according to a recent Cloud & Enterprise unit job posting:

"Today Microsoft delivers hundreds of different online services, from Ads to Xbox Live, from Bing to O365, and many more. Some of them run on Azure today, some on Autopilot, and some on their own legacy datacenter stacks. This company is transforming. They're all moving to Azure."

I'm still kind of doubtful "all" really means "all. I wonder if it just means "all new premium services." In other words, maybe it's just the newer artificial intelligence/Bing, IoT and business analytics services CEO Satya Nadella is so hyped about that Microsoft will guarantee will run on Azure from the get-go.

I asked Microsoft officials if they'd elaborate on the job post and was told by a spokesperson that no one would comment.

I did have a chance to ask Chris Suh, Microsoft's General Manager of investor relations today, whether Microsoft's plan to move more of its cloud services to run on Azure might be part of the reason for the operating profit decline of the intelligent cloud segment by 14 percent, to $2.19 billion, in its third quarter.

Suh said that part of the reason for the profit decline of intelligent cloud is because cloud services have lower margins than on-premises software and Azure growth is outpacing the growth of Microsoft's traditional software licensing business. He said moving more services to Azure is part of the growth of the segment's operating expenses, but "is not a material driver" at this point.

It's also worth noting that moving more Microsoft first-party services to Azure won't impact the company's commercial cloud run rate, since Microsoft doesn't earn revenue from its business units' usage of Azure.

For Microsoft, there's a longer term payoff for moving more of its cloud services to Azure. By having a common cloud back-end underlying its myriad existing and new services, Microsoft should be able to achieve savings in hardware purchases, as well as software and servicing due to shared infrastructure -- at least in theory.

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