Steve Ballmer’s Cloud Computing Ambitions for Microsoft

Worse for Google, cloud computing may produce lower margins than its core business. Sridhar Vembu, CEO of AdventNet, which runs the Web-based application suite Zoho, has calculated his competitors' revenue per employee and profit per employee and has come to a startling conclusion: "We simply don't believe Google has the rational business incentive to go deep into the business/IT software category." According to his study, Google makes more profit per employee ($214,000) than enterprise software giant SAP makes in revenue per employee ($199,000).

So what's Google up to? "It is in it to put Microsoft on the defensive on its home turf, so that Microsoft's offensive capability on the Internet is diminished," Vembu says. "It is also perfectly clear why Microsoft wants to be an Internet player: As Google has shown, it is a higher-margin business even than [Microsoft's] monopoly-profit core business."

So for those who think that cloud computing means Microsoft's days of printing money are numbered, company execs say, think again. "This gives us the opportunity to have far more people buying and using our product than today," Capossela says, noting that there are 1 billion Windows users out there, and only half of them use Office -- many of them pirates who might pay for the product if it were offered online.

The question is whether someone else's cloud-computing offerings would save Microsoft customers enough money to compensate for the inevitable problems created by switching software. And the answer may well be no. Benz says moving to the cloud hasn't saved him money, but it hasn't cost him money, either. That "cost neutral" scenario probably holds true for many companies, says Gartner analyst Matt Cain. Companies too small for Microsoft volume discounts -- those with, say, less than 1,000 employees -- may save money by moving to Web-based services from Microsoft or another company. But large companies or those that tweak their software a lot may find that their current deals with Microsoft are more cost-effective than anyone's cloud computing.

Flake certainly isn't the only one who believes that declaring Microsoft dead, a victim of the Web, is a bit premature.

Michael Fitzgerald wrote about the hydrogen economy in the May issue of Fast Company.