Microsoft Needs Apps To Win In The Cloud

Beyond executive shakeups, Microsoft needs to acknowledge this truth: Apps drive infrastructure
We think IBM’s definition of “Smarter Planet” and significant investments in predictive analytics, data appliances, and even the Watson project are all great examples of leading, not following, the market. No company in our view has the ubiquity of Excel and the potential to reshape the analytics markets like Microsoft.

Recall that Microsoft made a big splash in 2006 with the acquisition of ProClarity. At the time, ProClarity provided a simple, adaptable interface that allowed organizations to better utilize the complex BI features found in SQL Server. The product was a thin client analytics and reporting tool designed specifically as add-ons to SQL Server. Now Microsoft sells the combination of SQL Server, Office 2010, and SharePoint as its BI solution. ProClarity became Microsoft’s Performance Point Server in 2007, and eventually just became part of SharePoint Server in 2010.

Since that acquisition, the market has changed substantially, and Microsoft seems content to play within the traditional boundaries. We encourage the S&T group to think about this business across two different vectors.

First, we think Microsoft needs to push higher into the predictive analytics space and make data intelligence pervasive in all applications. Second, we think the BI products should all be able to leverage SQL Azure, enabling on-premises and cloud-based scenarios. Within Azure Marketplace we really like its Data as a Service play with the DataMarket. This is a good step in redefining the space and something that it can build upon.

From a structural standpoint, we think the division of the business applications group from Server & Tools is suboptimal. From a customer standpoint, this is a distinction without relevance since they tend to buy these products together. Business applications are hidden in the Business Division with Office and don’t seem to tie well to the advancements in S&T. Our point is that Microsoft needs to make a decision if it is in the applications business or not. Right now it appears it has a toe in the water, and we think it needs to either jump in with both feet or just get out. We think this complicates relationships with independent software vendors.

One of the advantages that has built through AppExchange is a nice ecosystem of complimentary niche software applications that integrate easily with its product family. Microsoft hasn’t built this obvious distribution channel for its partners.

In our opinion, Microsoft should clearly renew its business applications commitment. It isn't in the market in a meaningful way and at the same time isn't maximizing the benefits of an ISV ecosystem. We think Microsoft can outline a clear applications plan for small and midsized customers and leave the very large enterprise space to the incumbents. We see business intelligence and analytics on top of its Azure and server platforms as the natural product offering that could appeal to customers of all sizes.

Repositioning its products for cloud computing is clearly part of the answer, but it doesn't address the whole issue of what and how it sells and delivers its products to customers.

Jason Maynard is a senior analyst with Wells Fargo Securities.

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