Microsoft Shrinking Margins Loom on Cloud Push
Microsoft Corp. (MSFT)'s push into cloud computing will help the company compete with Google Inc. (GOOG), Apple Inc. (AAPL) and Salesforce.com Inc. (CRM) It also will hurt profit margins. — The company's cloud software lets corporate customers pay …
Context & Ripple Effects
The margin warning is the bill coming due on a bet Steve Ballmer made explicit in March 2010, when he said Microsoft was 'betting our company' on the cloud. Back in 2008 the company was still merely flirting with cloud-based applications while its Earth-bound license business printed billions; the intervening years turned that experiment into the stated core strategy.
What changed with this Bloomberg report is the framing: the cloud push is no longer pitched as pure upside against Google, Apple and Salesforce.com, but as a deliberate trade of Microsoft's famously rich software margins for competitive position in subscription-delivered corporate software.
First-order effects
- Microsoft's own P&L takes the hit first: every corporate customer converted from a high-margin perpetual or volume license to pay-as-you-go cloud software swaps near-pure software profit for a business carrying datacenter and operating costs.
- Corporate buyers gain a credible alternative to Salesforce.com and Google's apps inside an existing Microsoft relationship, putting direct pricing pressure on those two incumbents' per-seat contracts.
Second-order effects
- Google and Salesforce.com are pushed to defend their corporate accounts on price and bundle breadth rather than product novelty, since Microsoft's entry legitimizes cloud delivery for conservative IT departments that were their growth frontier.
- Investors must re-underwrite Microsoft's multiple as the revenue mix shifts toward lower-margin recurring streams, making the pace of customer conversion a live valuation question rather than a footnote.
Third-order effects
- If the pattern holds across the industry, enterprise software economics structurally migrate from licensing rents toward infrastructure-and-service margins, rewarding scale operators who can amortize datacenters and punishing pure-license vendors without cloud footprints.
- A durable consequence is that the strategic contest among Microsoft, Google and Apple moves from device-and-desktop share to whoever controls the subscription billing relationship with the corporate customer.
The trend: Enterprise software is trading high-margin license revenue for lower-margin cloud subscriptions, with Microsoft's conversion pace setting the reference point for the whole sector.