Microsoft Azure: The Cannibal

October 28, 2008

I wanted to steer clear of the Microsoft cloud computing announcement until more concrete information became available. I have mentioned the Monsoon paper that describes some of the engineering effort that is behind the Microsoft cloud computing play. This is the ACM paper dated January 8, 2008, by Albert Greenburg and four other authors. That write up raised a number of yellow flags in my thought processes.

I did spend some time with the excellent write up by Richard MacManus of You can read the full text of his article “Microsoft Azure Aims to Redefine the OS” here. The essay includes an official looking diagram showing the principal components of Windows Azure. Mr. MacManus does a good job summarizing the features of the system presented in a round table with Ray Ozzie, Microsoft’s top technical honcho.

For me, the most interesting point in the article was this headline, “Cannibalizing Desktop Windows?” Mr. MacManus raises an obvious and important business question; namely, will Azure suck money from more lucrative revenue streams? Mr. MacManus reports that Microsoft will have a “range of different licensing” options. To me that’s not an answer.

In my experience, a new product can cannibalize an existing product’s revenues. The effect is to pull some customers from the existing product to the new product. The result is that the established product flatlines or requires more marketing investment to regain the losses from cannibalization. At the same time, the new product is cash hungry for technical fixes and more marketing. Unless an organization is careful in its positioning, the one-two punch of investing in the new product’s technology and marketing and the increased spending for marketing the old product produces a cash squeeze. Accountants can smooth out this problem, but it is a race against time. The new product’s revenues have to come online quickly and then grow rapidly. If the new product is delayed or the revenue doesn’t flow, the “innovator’s dilemma” and business commonsense come into play.

Will Microsoft be able to handle this balancing task? Mr. McManus lets Microsoft speak for itself. Amazon has moved to secure its role in cloud computing. Google seems to be moving toward the Amazon and Microsoft model. In the wings are IBM and dozens of others who want a piece of the clouds in the sky–some would say “pie in the sky”–vision of a new growth market. Cloud computing will be like one of those playoffs between top rated teams. A cloud super bowl or world cup perhaps with digital thunder and lightning perhaps?

Stephen Arnold, October 28, 2008


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