Microsoft Heads for Clouds in China

TAIPEI, Taiwan (TheStreet) -- First the tropical island, now the Azure clouds.

American software giant Microsoft is taking another unusual voyage into China as its competitors stick to drier, safer ground.

Starting next week Microsoft will let Chinese consumers sign up for its cloud service, Windows Azure. The system is part of a 200-strong cloud product line already offered to a billion people somewhere in the world.

Microsoft announced the move in late May after agreeing to provide Windows Azure through the Chinese cloud enabler 21Vianet .

"This is the first time that international cloud services will be offered to businesses and consumers in China," 21Vianet President and CFO Shang Hsiao wrote in an email.

Google , , Dropbox and other potential Windows Azure rivals haven't made it into China despite the obviously large number of potential consumers.

Among the reasons those foes have stayed offshore may be the specter of censorship. Competition from local cloud providers in an immature, uncertain market makes China all the cloudier.

Microsoft is ready for both risks.

Foreign companies bringing any Internet services to China face government-driven censorship pressure that may be unpopular with clients. To make Big Brother's work easy, China generally just pushes local firms to develop Internet services.

But Microsoft had already made friends with authorities in China. In April it revealed plans to set up an "innovation center" on the unlikely Chinese tropical island of Hainan rather than Beijing or Shanghai -- cities that would put it closer to talent, suppliers and customers. That decision drew accolades from Hainan, where officials hope to use Microsoft know-how for local economic development.

One analyst guessed that the Hainan project was Microsoft's way of getting in good with China as a whole. Contrast that with Google, which in 2010 said that due to a hacking attack it would quit censoring searches in China.

Embedding itself further with the Communist leadership, Microsoft decided to spread its cloud over China by working with 21Vianet, the country's largest carrier-neutral Internet data center-services provider.

That partnership assures business for a local firm, which technically could help its government screen Internet content. 21Vianet will "operate and provide" Azure, to quote Microsoft's media statement on the tie-up.

Microsoft "is ceding control of its data center infrastructure over to 21Vianet," says a report in The Register, an online IT newspaper. "Microsoft can only provide support and troubleshooting know-how and will have to request access to the facility from 21Vianet."

Does it also need to beg Big Brother for a hall pass? The short answer: So what?

"The reason for Microsoft being the first to manage to do this is less likely because China 'needs' the help, as much as Microsoft is making big pushes as a part of its business strategy and giving China reason to 'accept' their break into the market," says Casey Baumgartner, analyst with Maverick China Research in Beijing.

So far, it's paying to test the skies. Microsoft share prices went up 4.7% from May 1 to May 24, and 21Vianet shares climbed 7.3% over the same period as both companies rolled out the news of their China partnership.

Credit that to the potential to make money. Market research firm IDC forecasts that Asia's cloud computing market will grow from $3 billion last year to more than $19 billion by 2016. Target clients are Chinese small to medium-sized businesses (SMEs).

Though so far unthreatened by any international rivals, Microsoft and 21Vianet are starting to size up competition from local cloud providers. They're marketing with the formulaic image that "foreign" confers safety and quality.

"Many of these SMEs looking to utilize the cloud will now be able to work with and rely on the first international cloud services provider in China and feel much more secure about the confidentiality and security of their data and applications that are stored in the cloud," the 21Vianet CFO says.

He further expects "better public cloud operations, including security and compliance" as well as "highly reliable (cloud) engineering and customer services."

China's homegrown competitors include Aliyun by e-commerce giant Alibaba (1688.HK) and HiChina, Baumgartner says. The first cloud service was offered in 2008, and the market remained "fragmented" as of 2011, Springboard Research's greater China associate vice president Bryan Wang once said on He called efficiency and control among the top goals of the nation's cloud providers.

There's one other risk for the Azure adventure: Anywhere you go, China included, Microsoft is better known (and not always liked) for its PC operating systems, including its embattled Windows 8, which isn't quite right either for ultrabooks or mobile devices. It's not known as a cloud provider yet, so despite some solid reviews for Azure in the tech media, consumers just might just give Microsoft's cloud a 50-50 forecast of rain.

At the time of publication, Jennings had no positions in securities mentioned.

Ralph Jennings is on LinkedIn.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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