Cloud computing is one of Microsoft's (NASDAQ:MSFT) biggest catalysts. The software giant now gets nearly 30% of its total revenue from the Intelligent Cloud business, which also happens to account for nearly a third of its total operating income.
The solid traction of Microsoft's Azure cloud platform has been critical to the rapid growth of this segment. Revenue from this platform had jumped 93% during the last reported quarter, pushing up total Intelligent Cloud revenue by 17%. More importantly, the adoption of the Azure platform isn't going to slow down anytime soon as it has been expanding its availability into several verticals, such as healthcare and government applications.
But connected cars are turning out to be one of the most important catalysts for Microsoft's cloud business -- here's why.
Why connected cars need the cloud
A significant portion of the data generated by the sensors on board a connected car will be sent to the cloud for processing and analysis. Hitachi estimates that a connected car will be sending nearly 25 gigabytes of data to the cloud every hour, including critical information like the speed, route conditions, and state of the vehicle's components such as the tires.
These variables, along with many others, will have to be analyzed to help the car make decisions on the road, thereby forming the foundation of self-driving cars. This is where Microsoft steps in with the Azure-powered Connected Vehicle Platform, which covers several aspects of autonomous driving from advanced driver assistance systems (ADAS) to navigation.
This cloud-based technology platform collects data generated by a car to deliver a host of insights to improve safety, deliver real-time information to the driver about road conditions, and help prevent vehicle downtime by signaling preventive maintenance measures. Microsoft also claims that this platform can improve the productivity of a car's occupants with the help of services such as Office 365, Cortana personal assistant, and Skype, among others.
This is why several companies have been warming up to Azure to fuel their self-driving car ambitions. For instance, mapping start-up Mapbox, which provides the underlying maps used by apps such as Snap and Instacart, will send information such as speed-limit signs and lane markings to Azure for real-time processing.
This is just the latest for Microsoft in a long line of wins that it has scored in the self-driving car space. Baidu has chosen Azure as the preferred cloud-computing partner for any potential customer looking to use the company's self-driving software outside China. Even ridesharing companies have been turning to Microsoft to boost their connected car offerings.
Indian start-up Ola is using Microsoft's artificial intelligence tools, productivity offerings, and the public cloud infrastructure to carry out preventive maintenance on its vehicle fleet. Ola is also looking to improve the rider's experience by delivering cloud-based infotainment and productivity options with the help of Microsoft Azure.
In all, Microsoft has built a solid portfolio of customers, including automakers such as Ford, Renault-Nissan, and Toyota, which have decided to use its cloud infrastructure to fuel their connected and autonomous car ambitions. So Microsoft has put itself in a really solid position to take advantage of a market that's set to grow by leaps and bounds going forward.
How big is the opportunity?
Microsoft estimates that 90% of new cars will be connected to the internet by 2020, so there will be a big data explosion considering the amount of data each vehicle generates. Now, it is difficult to quantify this opportunity in monetary terms, but we can get a rough idea of the overall size of the market thanks to the fee charged by Microsoft to access its cloud services.
For example, Microsoft charges a customer $0.017 to store each gigabyte of data, provided that customer stores more than 500 terabytes (TB) of data in a month. So the cost of storing 500 TB of data each month comes to $8,500. Assuming that each connected car is driven for two hours daily for 25 days a month, they would generate 1.25 TB of data (given the earlier estimate of hourly data generation).
In that scenario, Microsoft will need 400 connected cars to make $8,500 every month. Counterpoint Research estimates that over 125 million cars with embedded connectivity options will be shipped between 2018 and 2022. So Azure cloud could mint big money even if it captures just 10% of this market going forward, though it won't be surprising to see the company doing even better given the partnerships it has already struck in this space.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends Ford. The Motley Fool has a disclosure policy.