MSFT Q4: Cloud Growth, Pricing and the MSP’s Evolving Business Model

Microsoft (MSFT) suffered a net loss of $3.195 billion for Q4 on revenues of $22.2 billion when the company reported earnings this week. The huge loss was an expected result of the company’s write down of its Nokia acquisition.

This week’s earnings also gave us a peek into Microsoft’s performance in terms of execution on its cloud strategy. The company reported that commercial cloud revenue grew 88 percent driven by Office 365, Azure and Dynamics CRM Online and is now on an annualized revenue run rate of over $8 billion.

But here’s a twist on the cloud growth, as pointed out by Gregg Keizer of Computerworld in this article. He noted that the more users Microsoft puts on its Office 365 subscription rolls, the less it makes from each user. Keizer’s analysis includes an accounting of how revenue per subscriber for Office 365 has been declining and has dropped below $50 for the first time in this quarter.

Nadella talks SMB momentum

In a conference call with analysts following the earnings release, CEO Satya Nadella said that commercial cloud revenue includes growth from small business. He said there are about 50,000 SMBs signing up for Office 365 each month.

“That’s pretty unprecedented,” he told analysts during the call, as reported in this transcript from SeekingAlpha. “Having been in the server business all my life, I’ve never seen a lot of the small business customers adopt some of the rich capabilities like it’s possible now, and that’s great growth as well.”

Consumer growth in Office 365 was even more impressive, increasing to 15.2 million, with nearly 3 million subscribers added in the quarter, the company said.

Indeed, there’s plenty of momentum to get on the cloud bandwagon.

Pricing and the cloud

And yet for IT service providers, the cloud is a tricky proposition. Managed services offered channel companies better margins than traditional VAR businesses did, back when pricing suffered the pressures of commoditiziation. But the cloud is a different situation. The cloud doesn’t offer the good margins that managed service providers have enjoyed in providing RMM and other services to customers. And yet, if MSPs don’t offer cloud services to customers, then competitors will offer those services and you may end up losing accounts.

Can service providers maintain and even increase value, and therefore price/user? Or do you forgo the value proposition and become more of a commodity business that sells more volume than value?

Most MSPs I’ve spoken with about how to make money in the cloud are all about adding the value — maybe they are targeting a specific vertical market or offering a specialty service such as big data and analytics. But it’s important to point out that even the companies at the top of the food chain — Microsoft, for instance — are struggling with these same questions as the cloud disrupts familiar business models.

Here’s one more unsurprising tidbit from the Microsoft earnings this week:

License sales of Microsoft’s on-premise (perpetual) Office declined by $823 million or 18 percent. Microsoft attributed the drop to the continued transition of customers to Office 365 Commercial and lower transactional license volume, and also blamed a decline in the business PC market following Windows XP end of support in the prior year. On the consumer side, Office software license sales fell $330 million or 42 percent.

That said, what’s your experience been? How have you navigated your customers’ shift from perpetual licenses to Office 365? Have you made other changes to your business as a result? Let me know in the comments, or email me at Jessica (dot) davis (at) penton.com