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Microsoft Sees AT&T & IBM as Scary Lessons – Report

Mitch Wagner

Microsoft's board members are worried that its traditional software business could "evaporate" in a few years, and chairman John Thompson wants the company to be more aggressive in its cloud shift, according to a Bloomberg report.

Thompson and the Microsoft Corp. (Nasdaq: MSFT) board are pleased with CEO Satya Nadella's push to the cloud, but want to move faster, according to the report. They're thinking about increasing spending, overhauling the sales force, and managing partnership differently to speed things up.

The concern is born from experience. One director, former AT&T Inc. (NYSE: T) CFO Chuck Noski, saw the carrier's traditional wireline business "evaporate in just three years as the world shift[ed] to mobile," Bloomberg said. Noski and Thompson fear that the transition to cloud could be as fast, leaving Microsoft's traditional on-premises software business high and dry.

Microsoft is on track for $20 billion annualized sales for its commercial cloud products in fiscal 2018, but Thompson says Microsoft needs to do better. The board is questioning whether to invest more in the cloud, not just in technology development, but also sales and partnerships -- an Amazon strength.

The cloud is a lower-margin business than on-premises software, "squeezed by the cost of building and maintaining data centers to deliver the services," Bloomberg says, noting that Microsoft's gross margin dropped from 80% in fiscal 2010 to 65% in the year ending June 30 2015.

"That's a very different model for Microsoft and one our investors are going to have to suck it up and embrace, because the alternative is don't embrace the cloud and you wake up one day and you look just like -- guess who?" Thompson tells Bloomberg, which notes that Thompson spent 27 years at IBM. Thompson told Bloomberg IBM is now "not relevant anymore."

Microsoft's most recent quarterly report is a perfect example of its quandary. In the quarter ending in April, Microsoft saw cloud revenue increase, but overall revenue decreasing faster. Microsoft said its "intelligent cloud" business, which includes traditional server software as well as Azure, grew $3.3 billion to $6.1 billion, with Azure revenue alone more than doubling. But operating profits shrunk 14%. Overall revenue fell to $20.53 billion for the third quarter ending March 31, lower than the $22.09 billion analysts expected, and down from $21.73 billion in the year-ago quarter. (See Microsoft: Cloud Growth Fails to Offset Overall Revenue Decline.)

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— Mitch Wagner, Follow me on TwitterVisit my LinkedIn profile, Editor, Light Reading Enterprise Cloud.

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