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Welcome to Microsoft Pri0: That's Microspeak for top priority, and that's the news and observations you'll find here from Seattle Times reporter Sharon Chan.

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October 27, 2008 10:50 PM

PDC: Microsoft's Muglia on profit margins for Windows Azure, opportunities to work with Amazon

Posted by Benjamin J. Romano

LOS ANGELES -- Bob Muglia, senior vice president of Microsoft's server and tools business, shared his expectations of the impact Microsoft's new services platform will have on company profit margins, where he sees opportunities for collaboration with Amazon.com -- the company's biggest cloud competitor not named Google -- and more in an interview earlier today.

Check out these edited excerpts of our conversation. I've put the particularly interesting bits in bold for easier scanning.

Q: With Amazon making early moves in cloud computing and Microsoft unveiling Windows Azure, it's cloud offering today, and a cluster of major data centers popping up in the Northwest to take advantage of our cheap hydro-power, it looks like the region is in good shape to be a leader in this next era of computing.

Muglia: I think that's very true. I think that Amazon has done some amazingly great, pioneering work and it's a great company, and we, of course, have been building platforms for decades now so the two are very complementary.


You may have noticed that Amazon recently announced that they were offering Windows as an offering within AWS [Amazon Web Services], and that's great. We're very pleased to have them do that, and I have actually had a chance to talk to Jeff Bezos as early as May of this year about some of the things we're doing and some opportunities that we could even work together in the long run. It's still pretty early, but I actually see opportunities for the two companies to be able to participate and partner more.

Q: What does the move to services do to the existing Microsoft business model of selling server software? Here's an over simplification, but if I'm a small business or a start up that needs 40 servers now and maybe 80 down the road, and now I can just pay you a subscription for the incremental amount, that's 40 [software] licenses I wouldn’t buy and so it seems like there's a trade off or some degree of cannibalization there.

Muglia: At some level, of course, there are some choices people will wind up making. The reality of this, though, is that there is so much pent-up demand for applications ... that can't be fulfilled today. What we're doing with Azure more than anything is providing a platform that unleashes those new applications.

And, yes, there will be some substitution over time.

Now the structure of what we'll be able to offer has some great characteristics to it because when you look at the cost that it takes to build and run an application, the cost of the software ... is a very small percentage.

Now obviously they have to hire developers to write the software; they have to buy hardware and data center capacity, things like that. But the No. 1 cost that companies have is the operational costs on a day-to-day basis to keep the application running.

What we're able to do with the software technology we're building into Windows Azure is dramatically reduce those operation costs.

It's a case where Microsoft is actually able to grow our revenue and able to get value for the software we're delivering. And at the same time we can save customers money because they're actually able to run the applications for less than they would be able to run them themselves.

So it's a great combination when you can drive our revenue up and increase our shareholder value and at the same time save your customers money. ...

We certainly are seeing that in the case of the online services like Exchange Online and Sharepoint Online, where our revenues on those things and our profitability on those things are very positive and yet we're providing them at a very good cost savings to our customers.

Q: Are the margins comparable?

Muglia: Obviously there's capital costs that we're bearing, but in the overall scheme of things, we still expect to be able to have really good margins out of all of this.


"We've talked to some of the financial guys about this and ultimately, one of the biggest things is our ability to just, as a general rule, drive our profitability up over all. So, we think it will work out OK in the long run."

Q: Knowing that this new model takes a substantial capital investment, can we expect similar, lower, higher margins [than the historically profitable Windows business and Microsoft's other traditional software]? Do we know yet?

Muglia: First of all, it's too soon to know exactly because the exact cost components and the exact pricing of these things are all still to be determined. I think, overall, when you look at the over all costs for my business, my business is a little bit more expensive to run than, say, the Windows business is, and so my margin structure is not exactly the same as the Windows business. So I think it will actually be not that consequential in the end, but we'll see."

Here are operating margin's by business segment for Microsoft's fiscal first quarter:

Client (Windows): 77 percent

Business division: 67 percent
Server and tools: 34 percent
Entertainment and devices: 10 percent
Online services: - 62 percent

Q: Are companies going to need to pick a cloud platform provider?

Muglia: Most companies that are of substantive size are actually heterogeneous in their nature, right. I think that there will be a variety of reasons why people will wind up with multiple cloud platforms. Certainly, if you're buying applications and the applications have been written on one cloud platform, you're going to wind up having a propensity to go in that direction, but maybe a different app will be structured differently.

I would expect we'll see multiple cloud platforms inside different companies and that's frankly one of the new challenges that we need to all face and why we're doing some of the work to be open and heterogeneous in federation."

Q: What are the key things developers are going to look at when they're evaluating cloud platforms?

Muglia: First and foremost, their skill set. They'll start with their own skill set and what do they know. Certainly, if they're a Windows developer and they know .NET, then Azure will be very attractive to them and then from there it's the usual issues of what set of services are available, and do they provide the pricing and service level agreements that I need and all of the other things that are required when you chose any kind of service provider, when you're choosing a cellphone provider or whatever.

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