Microsoft’s future is in the cloud

Two longstanding giants of tech, Apple and Microsoft, are both on Fast Company’s list of 2017’s most innovative companies–but other than the fact that they both do tech, it’s hard to tell they’re competitors. Apple is the number 4 innovator, while Microsoft is down at number 31. We rarely talk about them in the same sentence anymore. Both companies make hardware, and both have a signature OS. But in the money and innovation game, Apple seems to be blowing Microsoft out of the water.

Apple began in ‘76, Microsoft in ’75, and they were the two main tech names in town. Competition in business is a good thing–it’s been especially good for Apple when it comes to competing with Microsoft in the “personal computer market”. Apple’s revenue sits at $233.7 billion, while Microsoft’s is $93.6 billion. The dominating factor is that smartphones are personal computers, and Microsoft doesn’t have an answer to the iPhone, unless you count the Lumia. Compared to the iPhone, how many people you know own a Lumia?

Microsoft does dominate in the OS market, with an 80% share vs. Apple’s 4.6%. Yet it’s easy to hang on to Windows 7 and keep working with it, while the newest iPhone summons lines of customers who are upgrading, and first-timers who are buying.

Apple’s innovations with hardware put it in its own personal computing stratosphere. It might not necessarily be a chip company, but Apple doesn’t care. In 2016, its engineers created the A10 chip to go with the iPhone 7, enabling the stunning depth-of-field effect in the phone’s camera, while the S2 chip improves the Apple Watch’s performance and gives the Airpod its ability to transmit music to two separate devices at once.

Meanwhile, in 2016 Microsoft brought Minecraft: Education Edition to classrooms. It leverages the hugely popular Minecraft game to help students learn both computational skills and subject-matter knowledge, and costs only $1 to $5 per student. In terms of cost and revenue potential, that’s a far cry from any of Apple’s offerings. The iPhone 7, 32 GB version costs $649.

But Microsoft has something Apple doesn’t: a proprietary cloud service with a lot going for it. Scratch that–it’s got a ton going for it. Independent research from simulation and modeling company Exabyte reveals that Microsoft Azure performs better than any of its rivals, including Amazon’s AWS. It even beats the Edison supercomputer. This puts Azure in the rare air because the company that hosts it, Rackspace, is considered to be one of the best cloud hosting services in the business, particularly well-suited for enterprises and the biggest websites. The other platforms that Rackspace hosts, including AWS, OpenStack, and VMware, don’t scale as well as Azure and neither does IBM’s Cloud.

The Verge reports that Azure revenue is up 116 percent, the biggest increase out of any of Microsoft’s offerings. Increasingly, Microsoft’s profitability and competitiveness with the other giants of tech–Apple, Amazon, and Google–will depend on a service the average user doesn’t even think about paying for the cloud.

The future of the cloud

Microsoft’s story is now interconnected with the story of the cloud and large-scale adoption of cloud-related services. As evidenced by its acquisition of LinkedIn, the company is now focusing more on business-to-business, as opposed to business-to-community, solutions. As Big Data, the cloud, and SaaS become more and more integral to the business world, Microsoft looks primed to dominate this space.

One example of cloud expansion is taking place in Human Resources and finance: in 2016, 53 percent of organizations used cloud SaaS solutions for payroll, a 12 percent increase from 2015. Cloud payroll is most suited for enterprises with an expanding global workforce, the type of organizations that are most likely to use Azure. SaaS and a scalable cloud platform can handle more employee data and payouts than any on-site solution. As globalization increases for enterprises so will cloud adoption.

According to McKinsey, by 2018, “More large enterprises are likely to move workloads away from traditional and virtualized environments toward the cloud—at a rate and pace that is expected to be far quicker than in the past.” And cloud adoption will rise for all other business sizes.

In 2015, just 10% of enterprises used the public cloud, while 51% will do so by 2018. Additionally, 40% of midsize business will ramp up public cloud usage, while small and medium-size business public cloud use will rise by 10%. Small businesses are most interested in the dedicated private cloud, the use of which will go up nearly 20%.

According to an IDG survey (as reported by Forbes) 2018 will also see 60% of IT department apps and platforms on the cloud, a 15% rise from 2015. This jibes with McKinsey’s survey, which predicts that dedicated and virtual private cloud services will see a 20% increase of consumption from IT departments, while public cloud Infrastructure-as-a-Service will see a 12% increase.

But concerns remain when it comes to cloud security. Due to the nebulous nature of the public cloud, 43% of the people in IDG’s survey are worried about where data is stored, and 41% are worried about the overall security of public cloud solutions. For the private cloud, “vendor lock-in” is the number one concern. Companies who don’t want to take IT to the private cloud don’t want to go whole-hog with a single cloud provider because they’re afraid that providers will restrict the flexibility of their cloud usage.

Public cloud usage will only continue to rise as security concerns fall. But the vendor lock-in concern isn’t easy for anyone to surmount. Still, only 24% in IDG’s survey were worried about lock-in.

Apple’s pushback

Microsoft may be poised to see a continuing increase in cloud revenue, but Apple isn’t content to merely sit on the periphery. Instead, it’s moving to its own cloud, called Pie. Pie doesn’t look to be a game-changer or a real competitor with Azure just yet; rather, it’s a cloud devoted to the Apple universe of Siri, Maps, iCloud, iTunes, and any other cloud-based Apple apps.

But if anything about Apple is salient, it’s that the company is highly competitive, so you can expect Pie to compete with other cloud services.

For those watching Microsoft and wondering if it will ever catch up to the likes of Apple in terms of revenue, the best you can do is keep watching. 2016 was a good year for Microsoft, and if the promise of Big Data and the cloud pay off in the coming years, you will see Microsoft re-emerge to be among the top 10 innovators by the year 2025.

Dan Matthews is a freelance writer who specializes in tech, business, and finance. You can find him on Twitter @danielmatthews0.