Quick thoughts on Microsoft and Amazon in the cloud

At the end of last year, I wrote a piece for Techpinions Insiders about what to expect for Amazon in 2015, as part of a series on major tech companies. As part of that piece, I wrote the following about Amazon’s AWS business:

AWS has been one of Amazon’s big success stories over the last several years, generating higher margins than e-commerce and growing extremely fast. But growth faltered a little in 2014, as competition, from Google and Microsoft in particular, intensified. The basic storage and infrastructure services are becoming rapidly commoditized, with plummeting prices and little real differentiation. As such, both margins and differentiation will move to what these companies build on the basic services; hence Amazon’s launch of Zocalo and other enterprise tools that sit on top of AWS. But here it is going up against Microsoft’s traditional stronghold and Google’s increasingly capable offerings. End user software hasn’t been Amazon’s strong suit, but it’s Microsoft and Google’s bread and butter. I remain skeptical of Amazon’s ability to successfully compete in this area. Meanwhile, others not in the cloud storage business are also building their own competing platforms at this higher layer, including Box, Salesforce and others. If AWS is to become the highly profitable core Amazon has always lacked, it needs to successfully compete at this layer as well as the basic services it has provided historically. It’s not clear to me Amazon will be any more successful at this in 2015 than it was in 2014.

This week, Microsoft reported its earnings for the December quarter, and among other things Satya Nadella said this about Microsoft’s own cloud business in response to a question about cloud margins:

Overall, the shift to the higher layer services is the real driver here, which is obviously Office 365 and its various levels is one factor. The other one is what I talked about in the Enterprise Mobility Suite, that’s really got fantastic momentum in the marketplace because the solution has really come together and is fairly unique, as well as Dynamic CRM.

So these are all got a different profile in terms of margin and they are all now pretty high growth businesses for us. So when you think about our cloud, you got to think about the low-level infrastructure. Even there we now have premium offerings and then we have higher level services. So that aggregate portfolio is what helps us move up the margin curve.

I juxtapose these two quotes – one about Amazon and one about Microsoft – because I think today’s announcement by Amazon of new enterprise email services plays directly into the challenge I described, and which Microsoft seems to be managing much better. It continues to be critical for both companies (and Google) to migrate their way up the cloud stack to the higher-layer services (as both I and Nadella called them), but Microsoft is already there, while Amazon continues to try to compete in a space I’m really not sure they can. We’ll see what AWS results look like tomorrow, but I expect this to be something that comes up on the call.