The Cloud

Microsoft Sees Money in the Cloud

Gross margins for Microsoft's business cloud services will reach 44% in the year ending in June, up from 15% a year earlier.
Katie Kuehner-HebertMay 1, 2015
Microsoft Sees Money in the Cloud

Microsoft is fully focused on the cloud to drive growth.

Like many software companies, the company is migrating to cloud-based subscriptions for its software and relying less on one-time licensing of packaged software, according to a Wall Street Journal story on Thursday.

Chief executive Satya Nadella told a group of analysts this week that Microsoft plans to roll out more subscriptions to consumers, much as it has for its commercial customers, the WSJ said. By 2018, Microsoft hopes to start pulling in $20 billion in annual revenues from its business-software subscriptions, representing a 40% annualized growth rate from this year’s subscription sales.

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The company had earlier said that it was currently on track to pull in annualized revenue of $6.3 billion from the subscriptions this year, based on the pace of recent sales of such products as the “web-friendly” edition of the Office bundle and the Azure computing infrastructure service.

Business-software subscriptions are also becoming increasingly profitable for Microsoft, as the company estimated that gross margins for its business cloud services would reach 44% in the year ending in June, up from 15% a year earlier.

However, the long-lived Windows operating system is still dependent on one-time licenses. Microsoft for the first time will give away free upgrades to Windows 10 to many existing Windows consumer and corporate users, the company said. The intention is to maintain dominance among commercial users and entice both consumers and businesses to buy more cloud-based subscriptions for its other products.

To make up for the lost revenue, the company hopes to generate revenue from new sources, such as on sales from a Windows consumer app store as well as from its software-developer partners, Nadella told the analysts. Microsoft also wants to sell videogames through the Xbox Live service and online advertising through the Bing search engine.

“As a result of its new business model for Windows, Microsoft acknowledged it would take a revenue hit in the short term, at least,” the WSJ wrote. “It said it would parcel out revenue from each Windows 10 software license over three years, instead of recording the revenue all at once when a Windows computer was sold.”