Case Discussion Questions
1. If Microsoft does not build a cloud computing
business, what might happen to the company
over the next decade? Why did the company de-
cide that it had little choice but to invest in cloud
computing?
2. The case talks about Microsoft's strengths, which
might help it to build a cloud computing busi-
ness. It does not talk about weaknesses. Can you
think of any weaknesses that the company might
have?
3. How does the business model for cloud comput-
ing differ from the traditional business model used
by companies such as Microsoft? What are the
implications of this new business model for Mi-
crosoft's future financial performance?
4. To develop its cloud computing business, Micro-
soft implemented a self-contained unit within its
organization dedicated to that task. Why do you
think that it did this?
5. Cloud computing is still in its infancy. If business
history teaches us anything, it is that events often
do not turn out the way that planners thought
they would. Given this, might it have been better
for Microsoft do adopt a "wait and see" attitude?
What would have been the benefits of delaying
investments? What would have been the costs?
CLOSING CASE
Planning for Rise of Cloud Computing at Microsoft
Microsoft is one of the world's largest and most
successful computer software enterprises. It's
strength is based upon two businesses: Windows,
the operating system which resides upon more
than 90% of the world's personal computers; and
Office, the most widely used suite of office produc-
tivity software in the world. These two monopo-
lies generate much of the $22 billion in free cash
flow that Microsoft generated in 2010, and are the
major reason for the company's stellar 2010 return
on invested capital of 38.57%. Both monopolies
are also under threat from the rise of a new com-
puting paradigm know as “cloud computing.”
For the last 20 years, individuals and enterprises
have stored their data and run their applications
on their own computer hardware. Individuals have
stored data and installed applications onto their
own machines. Enterprises have stored data and
installed applications onto their own networks
of servers and clients. The vast majority of clients
(desktops and laptops) have run Windows. A large
proportion of servers have also used the Windows
server operating system by Microsoft.
However, with the rise of high bandwidth (very
fast) Internet connections, it is becoming increas-
ingly attractive to store data and run applications
remotely “in the cloud" on server farms that are
owned by other enterprises. The largest owners
of server farms today are Amazon, Google, and
Microsoft. Server farms are vast collections of
thousands of computer servers. Each server farm
can cost $500 million to construct. Data can be
stored and applications "hosted” on server farms.
Individuals and enterprises can access these server
farms to run their applications from anyplace, any-
time, so long as they have an Internet connection.
The applications no longer need to reside on their
own machines. In fact, all that is needed to run
applications is a Web browser. In other words, you
may no longer need Windows on your machine
to run applications that are "hosted” on a server
farm. The Windows monopoly is therefore under
threat. In the future, an individual using a laptop
that is running a non-Windows operating system,
such as Apple's OS X, Google's Android, or Linux,
could conceivably run applications hosted on
server farms through their web browser.
There are compelling economic reasons why
enterprises might want to move their applications
to the cloud. First, they no longer need to purchase
their own servers and maintain them, which reduces
information technology hardware costs. Second,
they no longer need to pay for applications upfront;
instead they can adopt a pay-as-you-go approach,
in the same way that you pay for electricity from a
utility company. This is very attractive, since there is
good evidence that corporations overspend on ap-
plications, purchasing excess software that is rarely
used. Third, server farms can balance workloads
very efficiently, spreading out application runtime
from numerous customers, thereby optimizing ca- large numbers of servers in order to optimize
pacity utilization (in contrast, most enterprises must capacity utilization. Third, the company started
have enough servers for peak load periods, mean- to rewrite many of its own applications to run in
ing that most of the time they have excess capacity). Azure and moved them to the cloud. For exam-
This means that server farms can run applications ple, enterprises can now sign up for Office Live,
at lower costs, and some of those cost savings can be which is a cloud based version of Office that is
passed onto customers in the form of lower prices. run through a Web browser and hosted on Micro-
Microsoft first recognized the potential impor- soft server farms. Fourth, the company embraced
tance of cloud computing in 2006-2007. At that a change in its business model. The traditional
time, the business was tiny. However, through its business model for most Microsoft applications
environmental scanning, Microsoft quickly real- has required enterprises to pay an annual licens-
ized that over time, the economics of cloud com- ing fee for the number of copies of an application
puting would become increasingly attractive. The that they install on machines. The new business
company's strategic managers also understood model is a pay-as-you-go structure for applica-
the negative implications for their Windows busi- tions like Office Live that are hosted on Micro-
ness. The introduction of Google apps in 2008 soft's server farms.
underlined this. Google apps is a collection of Fifth, Microsoft realized that one of the im-
Office-like software, including Word Processing, pediments that corporations face when moving
spreadsheets, and presentation software, that is their own customized applications to the cloud is
hosted on Google's server farms, and that enter the cost of rewriting the applications to run on a
prises and individuals can access and run through cloud based operating system, such as Azure. To
a Web browser. You don't need Windows to run manage this, the company invested in the devel-
Google apps, and moreover, Google apps repre- opment of “tools” that would help programmers
sent a direct threat to Microsoft's lucrative Office complete the transition in a cost efficient manner.
business.
Finally, Microsoft understood that for security
Microsoft saw the rise of cloud computing as reasons, some enterprises had to maintain control
both a threat to their existing business, and an op- over data on de dicated servers (e.g., regulations
portunity to grow a new business. The company require banks to do this). In such cases, Microsoft
decided that it had little choice but to aggressively decided to offer its enterprise customers a "private
invest in cloud computing. Moreover, the company cloud," which is a collection of servers packed into
realized that it had several strengths that it could a container, running Azure, and hosting applica-
draw upon in order to build a cloud computing tions that are dedicated to just that enterprise.
business. It already had built server farms to run Private clouds enable enterprises to gain many
its search, X-Box live, and Hotmail businesses, of the economic advantages of cloud computing,
so it knew how to do that. Many enterprises that without moving all data and applications to a
used Microsoft applications would likely want to "public cloud."
continue using them on the cloud, which gave the By 2011, the cloud was starting to gain atten-
company an inherent advantage. The company tion. Although it only represented about 5% of
had a significant cash horde that could be used to the $1.5 trillion in global information technol-
finance investments in cloud computing, and, had ogy spending in 2010, numerous companies were
a wealth of software talent that could be used to starting to announce their investment in cloud
write applications for cloud computing.
services. In the first quarter of 2011 alone, IBM,
Beginning in 2008, Microsoft charted out a Hewlett-Packard, and Dell Inc. all announced their
strategy for cloud computing. First, the company intentions to increase their investments in cloud
made heavy investments in large-scale server computing infrastructure and applications. This is
farms. Second, the company developed a new op- an emerging market that is posed for rapid growth
erating system to run applications on the cloud. in the years ahead. Microsoft hopes that through
Know as "Azure," this operating system is spe- proactive strategic planning, it has positioned the
cifically designed to distribute workloads across company to do well in this new environment."
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