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Microsoft and Amazon Converging on Each Other in Cloud

- By Sangara Narayanan

Microsoft (MSFT) ex-CEO Steve Ballmer told CNBC that Microsoft is in a good position to take on Amazon (AMZN) in cloud computing and that the Windows maker still has a lot more work to do. The battle lines between the top two companies of the cloud computing industry have blurred over time. Microsoft is exceptionally strong in Software as a Service products while Amazon is in a position of strength in Infrastructure as a Service.

But Microsoft's infrastructure offering - Azure - has been growing at around triple-digit rates for the past several quarters, and it will be interesting to see how much growth Azure will post when Microsoft posts its third-quarter earnings before the end of this month. Amazon, on the other hand, has been slowly building products targeting the business productivity segment. Clearly, both these companies are trying to go after the other's strong points.

To put it simply, all the big cloud service providers are moving toward SaaS+IaaS and creating a horizontal offering in the cloud segment covering all areas, instead of building themselves with a vertical focus.

A recent report by Synergy Research Group also shows that big cloud providers are running away with the SaaS and IaaS market. According to data from the research group, hyperscale operators - aka large-scale cloud computing companies - accounted for 47% of the cloud infrastructure market in 2012; that share of the market has now grown to 68%.


"What's even more interesting is that hyperscale operators are now in control of the SaaS market as well, controlling 59% of that segment. Unlike the cloud infrastructure market, where the number of players can be easily counted, the SaaS market, which should essentially include most of the software makers around the world, is huge. For every niche segment there will be several players in the market, but hyperscale operators or big cloud companies are now running away with this market as well." - 1reddrop

Microsoft and Google already have a presence in the office collaboration software market with Office 365 and G Suite. Amazon has its own email service, WorkDocs, and has recently launched Amazon Chime, a Skype competitor. All three companies are fighting each other in the Infrastructure as a Service segment, but now the fight has moved on to SaaS, with special attention to the office collaboration software market.

The market for IaaS+SaaS is huge. The Infrastructure as a Service segment was estimated to be $22 billion in size last year, and the Software as a Service market was worth $38 billion , also in 2016, and is expected to double by 2020. There is enough space for all three players to grow, but the real fight is down to who is going to walk away with the biggest numbers.

Amazon and Microsoft are running neck and neck, and it might remain that way for some time before one starts pulling ahead.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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This article first appeared on GuruFocus.