Microsoft: Cloud revenue to hit in a couple years

Software giant heavily investing in cloud platform, but revenue drivers are still Windows Server and SQL Server

Microsoft plans to invest heavily in its cloud platform but expects to see little revenue for two to three years, Bob Muglia, the president of the server and tools business, said Tuesday.

Muglia also said Microsoft is still waiting for businesses to resume spending on client and server software, and he took a number of swipes at VMware, which Microsoft is battling in the virtualization and cloud markets. He made his remarks during a Webcast from the Goldman Sachs Technology and Internet Conference in San Francisco.Microsoft's 2010 task: Make the cloud clear

"From the perspective of investment internally, interest from customers and engagement clearly the cloud will be an area of focus," Muglia said. "But in the next two to three years that is not what will drive financial growth in server and tools. It is essentially zero percent of our current operating revenue."

Microsoft just this month began billing users of its Azure cloud platform environment.

Muglia said the revenue drivers in the interim will continue to be Windows Server and SQL Server. "The big dogs are driving it but the rest of the portfolio is doing well." While he did not cite specific products by name, he called out management, security and development tools as areas of growth.

He also said virtualization and new pricing structures around Windows server are causing more users to buy premium editions of Windows Server software and that provides incremental revenue per server sold.

"Historically, the enterprise version of the server has been under 10% of the overall units shipped for 10 years," he said. "Now that number is north of 20%."

Muglia said the holiday season was good for Windows 7 sales on the consumer side, but the pick-up on the business side has not happened. He said all of Microsoft's conversations with CIOs and business customers include talk about upgrade cycles from "XP to Windows 7. And we expect to see that over the next three years."

He did not mention Vista, which showed a poor uptake in the enterprise market and was replaced by Windows 7.

Muglia said Microsoft also expects those forthcoming corporate spending decisions to sweep across server sales, which he said were "anemic" last year but are on a road to recovery.\

"You have to think about last year where server hardware was down over 20% on a quarter-by-quarter basis," he said. "We exited 2009 with server sales roughly being the same as 2006. So we essentially lost two entire years of growth in 2009 but we do expect to see some growth as the economy recovers."

In terms of virtualization, Muglia said Microsoft continues to chase VMware on the high end, especially since Windows Server 2008 R2 shipped with new features for Hyper-V. But Muglia said in the SMB space that Microsoft has a substantial advantage over VMware mostly from a cost standpoint. Muglia also touted Microsoft's Virtual Machine Manager, which offers some support for VMware, as another advantage.

And he said Microsoft is seeing many companies put in Hyper-V deployments alongside their existing VMware installations, although he did not offer a numbers or percentages on customer penetration.

But Muglia said virtualization will become somewhat of a moot point as he predicts the action will transition to the cloud.He said that he had picked up a copy of "Cloud for Dummies" he saw lying on his administrative assistant's desk and that it did a pretty good job of describing the basics. But he said it missed an important angle.

"We see the cloud transforming the way applications are built over the next five to 10 years," he said. And he added that the cloud would change the way hardware is built and transform the way people operate and run systems.

"There are few companies -- Microsoft, Yahoo, Google, Facebook and a few others -- that are able to build these cloud applications because they have the resources to handcraft all of it. [Microsoft's] job is to make it easy for everybody to do it. Other companies like VMware are not equipped to enable people to build these applications."

Muglia also took another shot at VMware, saying Microsoft and Citrix are gearing up for some announcements in the coming months around virtual desktops and VDI that "will be highly differentiated from what VMware is doing."

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