[The Wall Street Journal] Rising Cloud Sales at Microsoft, Amazon Reflect Bigger Shift in Enterprise Market

Big companies such as General Electric Co.GE +3.15% are poised to move more of their internal operating software to the cloud. As they make the switch, Amazon Inc.AMZN -7.61%’s Amazon Web Services and Microsoft Corp.MSFT +5.83% increasingly are facing off to gain Fortune 500 customers.

The growing popularity of cloud services is reflected in rising revenue in both of their cloud businesses. Amazon and Microsoft Thursday reported significant growth in their respective cloud businesses, and have been edging out other competitors including Alphabet Inc.’s Google and International Business Machines Corp. The market is growing, in part, because a number of companies including Netflix Inc.NFLX -2.72% and GE have decided to drastically reduce or eliminate their data centers. “There is a population of CIOs who have looked forward five years and said ‘I want to get out of the data center business’,” said Dave Bartoletti, principal analyst at Forrester Research. To do that, they’re starting to move core business applications to the cloud. Netflix, for example, unplugged its last data center at the end of last summer.

GE has said that it is moving from 34 data centers down to four data centers. “Those four data centers will only hold what we value most secretly, our secret sauce that differentiates us completely in the environment – everything else is going to AWS from our perspective going forward,” said Jim Fowler, CIO of GE, at an Amazon Web Services conference in Las Vegas in October.

The market for cloud services is expected to rise to $27.4 billion in 2016, up from $14.9 billion in 2014, according to Synergy Research Group Inc. Over half of that revenue comes from Infrastructure as a Service where Amazon Web Services is the clear leader, said Jeremy Duke, Synergy founder and chief analyst. As of the third quarter of 2015, Amazon Web Services had 44% of the market, compared to Microsoft’s 9%, IBM’s 4.8% and Google’s 3.8%.

AWS sales rose to $2.4 billion in the most recent quarter up from $1.4 billion during the same period in 2014. Amazon Web Services, in a conference call with analysts Thursday afternoon,  said it has over 1 million customers. Many of those customers are small companies, according to Mr. Duke, that have used AWS to develop and test software.

Microsoft which also reported quarterly earnings on Thursday, said its “Intelligent Cloud” segment grew 5%, or 11% excluding currency effects, during the quarter to $6.3 billion, led by sales of its Azure cloud services, which more than doubled over the period, growing by 140%. Microsoft’s cloud business is anchored by Azure, but also includes sales of a broad range of enterprise services and products.

Microsoft’s goal is to reach a $20 billion run rate for commercial cloud sales by 2018, driven mostly by large enterprise customers. “Enterprise cloud opportunity is massive,” Microsoft CEO Satya Nadella said on an earnings call Thursday. “The move to the cloud has expanded the market opportunity that we’ve had more than ever before. We’re operating in a much bigger market,” he said

The latest numbers show Microsoft is doing a “masterful job keeping Office 365 subscription growth high enough to offset declines on Office,” said Gartner Research Vice President Merv Adrian. But many Fortune 500 companies are looking to maximize their current way of doing business –with an on-premises network –with cloud in a hybrid manner. They’re looking to have elements of cloud built into their private networks. That’s where Microsoft and International Business Machines Corp. and Hewlett Packard Enterprise HPE +4.32% are working hard to move that Fortune 500 base forward, he added.

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