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Microsoft CEO: 'Software is ultimately the biggest deflationary force' for businesses

Runaway inflation and rising interest rates are driving economic turmoil worldwide. In this tough environment, Microsoft (MSFT) CEO Satya Nadella contends cloud technology can help companies "do more" with fewer resources than they once had.

“Overall, we definitely see constraints in the macro environment that are leading to customers, and everyone essentially, asking the question of ‘How do we drive productivity?’” Nadella said during an interview for Yahoo Finance’s All Markets Summit, which will air on Monday, Oct. 17 from 9 a.m. EST to 5 p.m. EST. “When we think about software and technology, this is, in some sense, showtime for enabling any company to do more with less."

Cloud computing, which gives companies remote access to hardware and services through the internet, has been on the rise for years. Microsoft controls 21% of the global cloud market, putting it behind only Amazon's (AMZN) 39% market share, but ahead of Google and its 7% market share.

In 2019, Microsoft’s Intelligent Cloud business generated $38.9 billion of the company’s $125.8 billion in total revenue — or about 30%. The global pandemic supercharged the need for companies to deploy cloud platforms so they could operate without interruption. As a result, in 2021, Microsoft’s cloud revenue made up $60.1 billion of the company’s $168.1 billion in total revenue — nearly 36%.

Microsoft Chairman and CEO Satya Nadella speaks to Yahoo Finance's Dan Howley.
Microsoft Chairman and CEO Satya Nadella speaks to Yahoo Finance's Dan Howley.

“Cloud Migrations were super critical during the pandemic, even for resilience,” Nadella said. “And now, if you’re not on the cost frontier of the cloud, then you’re falling behind on productivity. If you’re not on the efficiency frontier of cloud native applications, you’re falling behind on productivity. If you’re not able to use the hybrid work infrastructure to bring everybody to be able to participate collaboratively in the organization, you’re falling behind.”

'Software is ultimately the biggest deflationary force businesses can use'

As companies look for ways to cut back, Nadella says the cloud could help them save cash. That would also help Microsoft’s bottom line if they turn to Nadella's company for those services.

By signing up for cloud versions of software like Office, companies can save on spending large sums on individual software licenses for each employee. And by using Microsoft’s infrastructure-as-a-service offerings, companies can eliminate the need for their own on-premise hardware.

“All of the macroeconomic headwinds that all of us face — none of us are immune — the tailwind we at least as a company have is our ability to deliver these solutions. Software is ultimately the biggest deflationary force businesses can use,” he explained.

Europe in particular stands to gain from the cloud, Nadella said. European countries are looking for ways to save on infrastructure as they contend with an energy crisis driven by the war in Ukraine.

“If you move to the cloud, by definition, you have the most efficient use of the scarce energy resource,” he explained. “Second, let's take a manufacturing plant. If you create a digital twin of a manufacturing plant, one of the benefits is you can make it more power efficient, because you can do the simulation to do the power draw that's most efficient. In fact, you can reduce waste as well. So overall, things of that nature, I think are going to drive up productivity.”

Microsoft isn’t immune to the economic forces hitting its clients, which include chemical company Dow Inc. and Twitter. Nadella says the company is using its own products to improve overall efficiency.

“We are applying it ourselves inside. How can we be more efficient in whether it's in our people operations or in our R&D, or whether it's in our finance or our supply chain?" Nadella said. "So I think you will see us…take our own solutions and deploy them as efficiently as possible to drive productivity and leveraging operating expense and capital efficiency, capital efficiencies.”

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Got a tip? Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter at @DanielHowley.

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