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Can Microsoft Catch Up to Amazon in Cloud Computing?

By Adam Levy – Feb 8, 2016 at 8:00PM

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Azure grew 127% last quarter, while AWS grew just 69%.

Image source: Flickr/gothopotam.

Editor's note: a previous version of this article incorrectly stated that Azure is the only cloud platform available for Windows devices.

When it comes to cloud platforms, there's Amazon (AMZN 3.10%) -- and then there's everyone else. Amazon Web Services, or AWS, is very nearly a $10-billion-a-year business. Last quarter, the company generated $2.4 billion in revenue from its cloud-computing division, up 69% year over year.

Microsoft (MSFT 1.92%) is widely considered the second-place cloud solution thanks to the widespread use of Windows. The company's Azure platform is growing rapidly. Microsoft reported that revenue from Azure increased 127% year over year last quarter, but it lumps its exact figures in with the rest of its intelligent cloud segment.

While it's growing rapidly, can Microsoft Azure catch up to AWS?

Relying on Windows 10
Azure has historically done well with enterprises that already use a lot of Microsoft products, including Windows and Windows Server.

Microsoft's goal with Windows 10 is to reach one billion devices within two to three years. That includes both PCs and mobile devices. Net Market Share's latest report shows Windows 10 climbed past Windows 8.1 and Windows XP to become the second most popular desktop operating system, with 11.8% of the market.

With an estimated 1.5 billion PCs in use, there are approximately 180 million Windows 10 users. Microsoft recently announced there are 200 million Windows 10 users, but that includes mobile devices and Xbox.

Why is Windows 10 important? Not only do enterprises that use Windows typically favor Azure more than those that don't, but the OS is built with Azure in mind. The built-in system backup uses Azure. Businesses can monitor all of its employees' Windows devices on its network with Azure Active Directory without any configuration. Users will be able to use a single sign-on to access apps and resources in the cloud, thanks to Azure.

Windows 10 is off to a strong start, and the growth in Azure is telling of the symbiotic relationship the two divisions have.

Jumping on the bandwagons
Microsoft isn't just resting on its laurels and hoping Windows 10 will drive growth of Azure. Satya Nadella is focused on making its cloud solutions a part of the next big waves in computing.

Almost a year ago, Microsoft introduced its Azure Machine Learning service. Machine learning has become a big focus of tech leaders like Google and Facebook in recent years as they aim to improve their abilities to understand users, and predict what they want. While it wasn't first to market (Google had an API for years, and IBM released its Watson technology to beta in December 2014), it beat Amazon by a couple months.

Last March, Microsoft unveiled its Internet of Things suite, which enables billing, monitoring, analytics, and predictive maintenance for IoT devices. Not to be outdone, Amazon unveiled its own IoT platform in October, which is tightly integrated with other AWS features. The Internet of Things market is expected to grow about 17% per year over the next six years, to $1.7 trillion, according to IDC. Cloud computing will play an important role in making those devices useful.

Can Microsoft catch Amazon?
While Microsoft's Azure is growing faster than Amazon Web Services, there's no exact way to tell if the gap is actually narrowing between the two companies. AWS added $1 billion in business year over year last quarter, which might be more than Azure's total business in the same period. AWS is profitable, bringing in $687 million in net income last quarter; it remains unknown if Azure is profitable.

While Microsoft is doing everything it can with its cloud platform, Amazon remains the one to beat, and still has a ton of momentum behind it. The growth of Windows 10, machine learning, and the Internet of Things, may help close the gap, but it's still a huge growth market that's essentially up for grabs.

Adam Levy owns shares of The Motley Fool owns shares of and recommends 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.

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