(Corrects spelling of company name in 22nd paragraph.)
Microsoft Corp. (MSFT)’s Windows Azure software and related programs have surpassed $1 billion in annual sales for the first time, a sign of progress in the effort to challenge Amazon.com Inc. (AMZN) in cloud computing.
The sales milestone for Azure -- which stores business information and programs on remote servers and lets customers access them over the Web -- was reached in the past 12 months, said Curt Anderson, finance chief for Microsoft’s server and tools unit.
Microsoft, the largest software maker, is counting on Azure and other Internet-based business programs to bolster growth as a global personal-computer slump erodes demand for Windows software installed on desktop machines. About 20 percent of companies tapping the cloud use Azure, compared with 71 percent usage for Amazon, according to James Staten, an analyst at Forrester Research Inc. (FORR:US) Within a year, Microsoft can command as much as 35 percent, he said.
“I expect them to double annually from here,” Staten said of Microsoft’s Azure revenue. “Microsoft probably has more net new growth opportunity sitting in front of them than probably anyone in the market.”
Microsoft’s $1 billion sales figure includes Azure, as well as software provided to partners to create related Windows cloud services, Anderson said in an interview. Azure customers use the services to run corporate programs, websites and applications from Microsoft’s data centers, rather than spending on their own servers, storage machines and workers to maintain them.
Azure subscriptions have risen 48 percent in the past six months, said Takeshi Numoto, Microsoft’s vice president for marketing for the server and tools division. That unit, which encompasses Azure, has posted nine straight quarters of sales growth of at least 10 percent, he said. Windows sales were $18.4 billion last year, down 5.7 percent from a peak in 2010.
Gaining ground against Amazon won’t be easy. Microsoft will need to do a better job of convincing existing customers, as well as newer companies seeking to reduce computing costs, why they should opt for Azure, Staten said.
“The majority of people thinking about cloud weren’t thinking of Azure first,” Staten said. “That’s been an uphill climb for them, and even though Microsoft is now matching the prices of Amazon and some of the capabilities, they haven’t really answered the question of ‘Why Azure?’”
Startups, which tend to be early adopters of new technology, may be an especially hard sell, he said.
“They haven’t excited the front-line developers -- the ones who made Amazon who they are,” he said. “Those will be hard to influence.”
Take Forest Key, an ex-Microsoft manager who is now chief executive officer of hotel-software startup Buuteeq Inc.
Even after Key’s firm participated in a Microsoft program that gives free software to startups, he chose Amazon’s cloud service two and a half years ago. Now that Azure is more on par with Amazon, Key said he doesn’t want to switch.
Anne Temme, a spokeswoman for Seattle-based Amazon at Weber Shandwick, didn’t respond to a request for comment.
Still, Microsoft is making progress, said Scott Maxwell, senior managing director at OpenView Venture Partners in Boston. The company is teaming up with venture firms and investment groups, often giving away its services so that as startups grow, they’re already Microsoft customers. More of his companies are bringing up Azure as an option, and he’s encouraging them to look into it, he said.
“Microsoft is getting really focused and making huge moves in the market,” he said. “They’re really trying to get more companies on the platform.”
Microsoft shares rose 2.6 percent to $32.61 at the close in New York. The stock has increased 22 percent this year.
Earlier this month, Microsoft rolled out a new set of cloud services designed to more directly challenge Amazon and vowed to match the online retailer’s lowest prices for competing products. Since then, Azure added 10,000 customers, Numoto said.
With the latest offering, Microsoft entered a niche known as Infrastructure as a Service, which lets companies move applications to the cloud by renting storage and servers -- instead of older versions of Azure that required customers to write programs from scratch.
$30.6 Billion Market
It’s the fastest-growing part of the cloud market, according to Gartner Inc., which estimates that sales of infrastructure services will surge by an average of 38 percent annually to $30.6 billion by 2017 from $6.17 billion last year.
“Not that many people have quite figured out that the Azure of today is not the same as two years ago,” David Smith, an analyst at Gartner, said in an interview. “It’s changed a lot and the issue is getting people to give it a second look.”
One early convert is Goodyear Tire & Rubber Co. (GT), which last year moved a North American program that tracks tire performance and wear to Azure from an internal system. The application, which has almost one million data points on various tires for vehicles ranging from trucks to school buses, helps Goodyear catch safety issues and propose the best products for typical road conditions in a specific region at a given time of year.
Goodyear, the largest U.S. tiremaker, opted for Azure over Amazon because it already used Microsoft’s database and programming tools, said Johnny McIntosh, director of Goodyear’s fleet headquarters in North America.
When Goodyear wanted a similar system in Singapore, it took less than an hour to set up, he said.
“It’s not all been rainbows and sunshine -- we were an early adopter so you know there will be some growing pains,” he said. “But overall it’s heavily used and it’s held up well.”
The total cloud market, which includes categories like advertising, where Azure and Amazon don’t compete, is forecast to rise to $237.2 billion in 2017 from $108.9 billion last year, according to Gartner. Amazon Web Services’ annual revenues could reach $20 billion by 2020 from $1.8 billion last year, Carlos Kirjner, an analyst at Sanford C. Bernstein & Co., estimated in a research report earlier this month.
One area where Microsoft has an edge over Amazon is in the so-called private cloud, which lets customers run Web-based programs via their own data centers. Microsoft also links Web- based applications to its traditional software. Amazon hasn’t focused much on the private cloud, Staten said.
Microsoft’s flexibility helped win over Xerox Corp (XRX), which is barred by some government customers from running its programs in the public cloud. Azure enables Xerox programmers in Bangalore, India, to coordinate with users in the U.S., said Raman Padmanabhan, chief information officer for Xerox’s business services unit.
Under the old system, U.S. customers often discovered bugs when it was the middle of the night in India. Now, Indian engineers run virtualization software that replicates systems running in the U.S. to speed development and test new software, he said. The result: costs were cut by 30 percent, productivity improved by 40 percent and 70 percent fewer engineers quit in frustration.
“The biggest advantage I have with Microsoft is I don’t have to go to any other vendor for any solution -- I can go to one partner for all of my operating systems, all of my development environment and all of my infrastructure tools,” he said. “Why would I waste time looking at another third-party solution?”
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