Microsoft (MSFT +0.63%) recently unveiled Azure App Service, a new cloud service which combines three older products: Azure Websites, Azure Mobile Services, and Azure BizTalk Services. Uniting web, mobile, and enterprise apps on a single cloud platform will allow developers to create an app once and deliver it across multiple devices.
This complements broader Microsoft strategy of launching "universal apps" for phones, tablets, and PCs running Windows 10. However, Azure extends that universal reach to non-Windows devices with support for Apple iOS, Google Android, and web-based apps.
Source: Wikimedia Commons, Ben Franske
Developers currently on the three standalone platforms will not have to pay higher subscription rates -- individual services will simply be integrated with the other two. Microsoft also recently announced an Azure for Student Developers program, which provides high school students with free access to Azure services.
Let's take a closer look at what Azure App Service means for Microsoft and how it can help the company narrow the "app gap" with Apple and Google.
The business of mobile backends
To understand why Azure App Service matters, we need to discuss the business of mobile backends. If a developer creates a simple app, like a calculator, no cloud connectivity is required. But if an app requires user authentication, social network integration, or delivery of push notifications, its backend must be hosted in a cloud-based service known as mBaaS (mobile backend as a service).
All the major mBaaS solutions, such as Azure Mobile Services, Facebook Parse, Amazon Web Services, Google Cloud Platform, and Apple CloudKit are free for low-traffic apps. More popular apps require premium plans, which can cost hundreds to thousands of dollars.
A secondary way to monetize apps
Since apps hosted on Azure can run on non-Microsoft platforms, it represents a way for Microsoft to capture developer dollars outside of traditional app store sales.
Microsoft, Google, and Apple all retain 30% of app sales from their mobile app stores. Microsoft has about 500,000 apps in its Windows Phone store. Google and Apple, on the other hand, both host over 1.4 million apps. Those numbers suggest the Microsoft app store is the least profitable of the three.
However, if Microsoft can convince iOS and Android developers to host the backends of their popular apps on Azure, it can profit from monthly subscription fees. This is the same reason Facebook acquired Parse in 2013. Facebook knew that it could not launch a full mobile OS and app ecosystem to compete against iOS and Android, so it attracted developers to Parse by offering direct Facebook integration and mobile app install ads in its News Feed.
Write once, run anywhere
By combining mobile, web, and enterprise apps into a single service, Microsoft is letting developers write an app once and run it anywhere.
Merging this strategy with Windows 10 universal apps makes it more appealing to develop apps for Windows Phones. In the past, developers shunned the operating system which accounts for less than 3% of global smartphones, according to IDC. With Windows 10 universal apps, that potential audience widens to include Windows PCs, tablets, and Xbox Ones.
Source: Microsoft
With Azure App Service, that reach is extended to web browsers and the backends of rival mobile platforms. It will also let customers connect their apps to external services like Oracle Siebel software and Microsoft Office 365. That combination is a potent one which could help Microsoft reach more users than Google, Apple, Facebook, or Amazon.
Why investors should care
Azure is the backbone of cloud expansion efforts at Microsoft, which also include Office 365 and Dynamics CRM. Last quarter, those three services boosted commercial cloud revenue by 114% year-over-year, bringing its annualized run rate to $5.5 billion.
Although that represents a mere 6% of the $94 billion of expected revenues for fiscal 2015, it is clear that expanding into higher growth cloud-based businesses is paying off for the company.
If more developers subscribe to Azure App Services, cloud revenue will further increase. The service could also help the company indirectly profit from iOS and Android apps while convincing developers to give Windows 10 apps a chance.
