Microsoft's (NASDAQ:MSFT) cloud is growing rapidly. The company's cloud (including PaaS, IaaS, and hybrid cloud) grew 154% in the third quarter of fiscal 2014 and propelled the software giant to the second position in terms of market share behind Amazon's (NASDAQ:AMZN) AWS.
Microsoft's cloud grew by triple digits last year, finishing with 103% year-over-year growth compared to the previous year. Plus, Microsoft Azure and related cloud software sales brought in more than $1 billion in annual revenue for the company last year. At current growth rates, that figure will more than double by end of June when the company's fiscal year comes to a close.
So, what is fueling this robust growth that has turned Microsoft into a serious AWS contender? Just a few years ago, AWS was completely overrunning Microsoft Azure and its peers, and it appeared as if no company could realistically hope to challenge its overwhelming dominance in the public cloud.
New cloud strategy
Microsoft's first cloud strategy under CEO Steve Ballmer was to take AWS head-on by offering IaaS, or Infrastructure-as-a-Service, which is AWS's main forte. IaaS lets companies shift their applications to the cloud by renting servers and storage. AWS is the overwhelming IaaS leader with a 33% share of the market. Microsoft can only lay claim to a paltry 3% slice of this market, while Google has a comparable share.
Amazon literally bulldozed upcoming competitors like Microsoft and Google by using its far superior product offerings and extensive networks. As a result, both failed to gain any meaningful traction. The cloud space operates very much like the mobile space, where companies with the largest infrastructure networks, and the most applications installed on customers' operating systems, routinely call the shots.
Microsoft's second strategy under Satya Nadella, who was then chief of Microsoft's Cloud and Enterprise Group, was to try its luck in the PaaS, or Platform-as-a-Service, market, which was much more fragmented and Amazon was not so dominant.
Currently, Amazon commands a 17% share of the PaaS market, closely followed by Microsoft and Google with 14% and 13% share, respectively. PaaS is growing rapidly and creating about $100 million in new revenue every quarter for companies with more than 10% market share. But, Nadella's biggest win was offering hybrid cloud for enterprises.
The hybrid cloud
Barely two or three years ago, many enterprises were reluctant to move their key data to the public cloud due to security, privacy, and compliance issues. They instead preferred deploying private clouds, usually through OpenStack. But, OpenStack suffers from a big drawback -- it does not run well out of the box, and requires a lot of time and money to get the cloud running and in usable form.
Microsoft quickly saw an opportunity here and started offering hybrid cloud solutions for enterprise customers. Hybrid clouds are a combination of private and public clouds. The hybrid cloud strategy involves moving certain workloads that are not security-sensitive to the public cloud, while retaining sensitive data in private clouds. Hybrid clouds have become so prevalent today that they are almost considered a standard way of operating in the cloud by most organizations.
Microsoft offers several solutions, and the company recently made a number of new hybrid cloud offerings. But, perhaps the best is Express Route, which is the company's answer to AWS's Direct Connect. Express Route provides customers with a fast and secure connection between on-premises and Azure public IaaS resources. Microsoft will offer extensive support services for the new platform, including disaster recovery, previewed Azure Files to improve sharing between different clouds, and improved networking and computing functionality.
Microsoft also announced a new partnership with Apprenda, a private PaaS solutions provider. Apprenda already boasts big customers such as JP Morgan Chase. The partnership allows customers to leverage Apprenda's private PaaS for private workloads, while deploying Microsoft's IaaS for public workloads. Customers who already use Apprenda will get the same amount of Azure resources at no extra cost. Microsoft is also leveraging extra services such as Active Directory, System Center, and Visual Studio to allow Apprenda users to access Microsoft tools with which they are already familiar.
Microsoft is showing a willingness to maintain a vendor-agnostic position by allowing other clouds to connect to Azure services. This makes the concept of building hybrid clouds a more straightforward process. The crossover cloud strategy that incorporates infrastructure, application, and platform services will greatly help Microsoft become the market leader in adapting to the new cloud, mobile and social media enterprise infrastructure model, and make it easier for companies to shift their core ERPs to the cloud.
Microsoft's hybrid cloud strategy is paying off handsomely, as shown by its strong cloud growth. This strategy gives the company a clear differentiator from AWS and might become its strongest selling point as the cloud wars escalate.
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Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Google (C shares). The Motley Fool owns shares of Amazon.com, Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.