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Microsoft's Azure cloud feels the pinch in price war with Amazon's AWS

Ah, the old 'Windows upsell' one-two

By Gavin Clarke, 28 Apr 2017

Analysis Sales of Surface, falling 26 per cent year-on-year, wasn't the only wrinkle in Microsoft's third-quarter trading period.

Management beat the cloud drum for Wall Street on Thursday, talking across-the-board growth.

Azure, Dynamics 365 and Office 365 commercial saw the biggest revenue growth, according to Microsoft – 93 per cent, 81 per cent and 45 per cent respectively.

Getting a more material breakdown is impossible as these are buried within bigger business units. Microsoft rarely reveals individual numbers – and when it does they are cherry-picked.

Overall, the unit responsible for Azure, Intelligent Cloud, converted that 93 per cent growth into $6.7bn revenue – up 10 per cent year-on-year.

The stable housing Office and Dynamics, Productivity and Business Process, converted the online apps' growth into overall revenue of $7.9bn, up 22 per cent.

It should be noted that Productivity and Business Process also includes the on-prem as well as the cloud, 365-branded versions of its business suites.

Intelligent Cloud includes such popular perennials as SQL Server and Windows Server.

So far, so good – but runaway sales aren't translating into runaway cash growth for Microsoft.

Income for the Azure group is more or less flat year-on-year – growing less than 1 per cent to $2.1bn.

Apps was worse for Microsoft. Income fell 6.6 per cent to $2.7bn for the Productivity and Business Process unit.

Over at Microsoft's number-one cloud competitor, Amazon, things were smaller but rosier. AWS made less than both Microsoft's units combined during the last three months – revenue of $3.6bn, up 23 per cent – but income grew, up 41 per cent to $724m.

The pair have been in an ongoing price war, which seems to be taking its toll on Microsoft.

Redmond made a round of cuts in February, hacking virtual machines and storage by up to 51 per cent. AWS had made 53 price cuts by the end of 2016.

Investors confronted Microsoft management about this during its third-quarter conference call. "To what degree do those price cuts actually affect you," asked Morgan Stanley's Keith Eric Weiss.

Top brass swerved a direct answer but made a pitch about "price competition at the lower level".

"Because we're able to continue to move people up the stack, including all the way up to the business process layer, I think you'll continue to see us be confident in our ability to move and create margin and growth," chief financial officer Amy Hood said.

It's the same play as Windows of old: pushing customers to the "premium" SKUs – the versions with the supposedly better features.

Microsoft's strategy is clear – onboard people cheaply and as they generate data and come to depend on your various cloud services, either up the prices or ensure they take on enough features that help push up the overall bill.

Whether that washes in the face of a keen price competitor such as AWS is unclear and it'll depend on whether Microsoft's customers are willing to surrender their choice on cloud infrastructure as they did, or were forced to, on PC and server infrastructure in decades past. ®

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