Microsoft commercial cloud, Azure vs. Amazon Web Services is nice storyline, but misguided comparison

One storyline following earnings from Microsoft and Amazon revolved around pitting Azure vs. Amazon Web Services, but the comparison falls apart based on product portfolio.

Why? First, Microsoft's commercial cloud and AWS are apples and oranges. Second, Microsoft's commercial cloud is more akin to Salesforce and Oracle or even Google than AWS. And finally, Microsoft Azure vs. AWS isn't zero sum because the cloud pie is large enough for both.

Now we all know the tech industry loves its zero sum storylines, but don't get distracted. Microsoft said that its commercial cloud annual run rate is north of $20 billion now. AWS is on an annual run rate of $15.9 billion.

Here's the catch. Microsoft's commercial cloud business is driven by Office 365. Microsoft's commercial cloud rollup also includes Azure; Office 365 business services (Exchange Online, SharePoint Online, Skype for Business Online, Microsoft Teams); Dynamics 365; and its Enterprise Mobility + Security Suite (EMS).

Microsoft Office 365 now has 120 million business users

Microsoft doesn't disclose Azure revenue in its quarterly results, but has started to break out commercial cloud sales.

What is cloud computing? Everything you need to know from public and private cloud to software-as-a-service

Jefferies analyst John DiFucci estimates that Azure by itself has an annual revenue run rate of $5.4 billion.

DiFucci wrote in a research note:

We believe the majority of Commercial Cloud is Office 365, a large part of which is not really a Cloud business. The Exchange, SharePoint, Lync, and OneDrive components of Office 365 are Cloud services, but the Productivity Suite that everyone has is very similar, if not exactly like Office on-premise (perhaps with automated updates on). As such, gross margins of this important part (if not the majority) of Office 365 are probably 90% or more - which means the gross margins of the rest are probably significantly lower than the reported 57%. We do not believe that Microsoft ever realizes the same margin profile as AWS at the same scale given operational and cultural differences.

Source: zdnet