Steve Ballmer’s Cloud Computing Ambitions for Microsoft

Inside Steve Ballmer’s push into Web services.

Gary Flake’s Live Labs manifesto proclaims that his group lives at the intersection of problems and solutions. The same spirit is behind the company’s emerging “cloud” computing services. Office, Microsoft’s cash cow, is expected to offer a more complete set of cloud- or Web-based features for business before the end of the year, and when it debuts, Google will inevitably be seen as the primary motivator for Microsoft’s move. As Rob Enderle, who runs an eponymous technology research firm, says, “Can Microsoft do it before Google can execute?”


Microsoft execs insist — perhaps predictably — that the company’s customers, not its competitors, spurred it to act on a long-simmering desire to shift from desktop-and-server software to Web-based services. And that, they contend, gives them an advantage in the marketplace.

In May 2004, CEO Steve Ballmer called a meeting with his newly minted CIO, Ron Markezich, and former CIO Rick Devenuti, who had moved up to become head of worldwide services. Ballmer told them that he and Bill Gates had decided that Microsoft’s future was not going to be selling licensed software, but Web-based software, and that “IT needed to lead the way.” He gave them a month to work out a plan.

Devenuti and Markezich knew where to start. Just weeks earlier, Devenuti had been in St. Louis visiting Energizer Holdings, the $5 billion battery and personal-products company. Its CIO, Randy Benz, was coming off a series of hellacious IT headaches, from crippling viruses to server outages on deadline. Benz was tired of his staff spending so much time on the Batphone to Microsoft, trying to get things fixed. He told Devenuti that he wanted Microsoft to run Energizer’s servers. At the time, Devenuti demurred, but now Energizer provided an ideal test bed for working out the kinks in moving to Web-based services.

Energizer might seem an unlikely guinea pig: It had only about 14,000 employees at the time (16,000 today). But Energizer operates in 49 countries, and Markezich, now corporate VP of Microsoft Online, says that Microsoft had to solve technology challenges large businesses would face, like affordable storage and the difference in network speeds between the United States and places like Sri Lanka. “The perception is that you just flip a switch and you’re in the cloud,” Markezich says. “Nothing could be further from the truth.”

A few months later, Microsoft removed the email servers from Benz’s list of daily headaches. Benz, who once thought it was “incredibly stupid” that he spent more resources maintaining systems than helping his company exploit them, says that now Energizer’s workforce is better able to take advantage of new software features as it gets them. Being in the cloud has been an unqualified success for Energizer, says Benz. “This is the way IT ought to get delivered.”

Microsoft now has 20 multinationals using its cloud offerings, including Coca-Cola and Nokia; another 3,500 companies are testing a version using shared servers that should become generally available this fall. Exchange email, Sharepoint collaboration, Communications Server instant-messaging, and the Dynamics customer-relationship-management software are among the products Microsoft has moved to the cloud.


Still, “for customers, we’re probably in our preteen years” when it comes to Web-based services, admits senior vice president Chris Capossela. Office, Capossela’s baby, will enter unruly teenagerdom this fall, as Microsoft expands Office Live, which it already offers on the Web. He predicts that in five years, half of all Exchange mailboxes will be in the cloud, and 100% of Office users will be using at least some cloud features.

Although Google’s Web-based applications such as word processors, spreadsheets, and Gmail are direct shots at Office, its efforts are very much a work in progress — Google Docs, for instance, doesn’t yet have a grammar checker and supports only 11 fonts, notes Guy Creese at the Burton Group. Google’s online apps suffer from outages, too, including a highly publicized 45-minute glitch in July. The number of companies using Google Docs “is meager,” says Dana Gardner, principal analyst at Interarbor Solutions. So Microsoft’s timing may be better than anyone thinks.

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.