Cloud Awakens Microsoft’s Server And Tools Giant

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The cloud is the future of IT and Microsoft’s Server and Tools business has the company poised to cash in on that opportunity

Has the cloud awakened a sleeping giant at Microsoft?

Well, as quiet at it is kept, Microsoft’s strong, steady and increasingly effective Server and Tools Business has crept into the limelight as one of the company’s major sources of income, beginning to challenge long-term cash cows such as Windows and Office in terms of contribution to the Microsoft bottom line.

At the 2010 Microsoft Financial Analyst Meeting (FAM), Bill Koefoed, Microsoft’s general manager of investor relations, said Server and Tools ended the 2010 fiscal year “with record revenues and record profits. It is now a $15 billion a year business and is growing at a good pace.”

Indeed, Microsoft’s Server and Tools Business saw five percent growth year over year and 14 percent in the fourth quarter.

Enterprise growth

Kevin Turner, Microsoft’s chief operating officer, broke things down a little further. Turner said Microsoft’s business division – which includes Office, SharePoint and other leading products – delivered 29.8 percent of the company’s revenue ($18.6 billion), Server and Tools drove 23.8 percent, and Windows and Windows Live delivered 29.6 percent ($18.5 million) of Microsoft’s revenue last year. Those three groups alone produced more than 80 percent of Microsoft’s business.

The other core businesses, Entertainment and Devices accounted for 12.9 percent of revenues, and Online accounted for 3.5 percent. Moreover, looking at customer segments, enterprise customers accounted for 35.8 percent of the company business, small and medium business for 20.5 percent, consumer for 16.9 percent, and OEM for 26.8 percent, Turner said.

With the enterprise clearly the sweet spot for Microsoft’s current sales, many observers wonder why the company continues to place so much emphasis on the consumer side. Well, obviously there is room for growth in this segment for Microsoft – as there was in the enterprise a decade ago. Indeed, Microsoft was not seen as an enterprise provider just 10 or so years ago – yet today the enterprise represents more than one-third of Microsoft’s business. Will the same happen in the consumer space? Microsoft certainly hopes so, but the company has much to do in that area.

The consumer opportunity

For his part, Turner focused on the enterprise in his morning presentation, however, Microsoft CEO Steve Ballmer focused on the consumer opportunity during his talk later in the afternoon.

“Microsoft is hitting on every cylinder,” Koefoed said.

Koefoed explained that Microsoft has eight core businesses the company focuses on. These are: Xbox and TV, Bing, Windows Phone, Windows, Office, Business Users, Windows Server, and SQL Server. Business Users focuses on the business scenarios of manageability and virtualisation, including technologies such as Exchange, SharePoint, etc. And the Windows and SQL franchises capitalise on the cloud with Windows Azure and SQL Azure.

Meanwhile, enablers of those eight areas include Microsoft vehicles such as Microsoft’s retail stores and online marketplaces, services and support, the Microsoft Developer Network (MSDN), mice/keyboards, Mediaroom, Visual Tools, and Windows Live, with Microsoft Dynamics also playing a role as its own entity.

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