We’re in the afternoon at Microsoft’s Financial Analysts Meeting in Redmond, and getting into the wonkier side of the business: productivity software like Office and the server business. They also happen to be profitable, as opposed to online services (money loser) or entertainment and devices (mildly profitable). Stephen Elop, head of Microsoft Business Division, and Bob Muglia, head of server and tools, just spoke.
Muglia talked more about how cloud computing would change the way Microsoft makes money while potentially lowering what businesses spend on IT. Cloud computing, a growth area for the tech industry, will offer companies the opportunity to turn over IT management, software and data to data centers run by software companies like Microsoft, Amazon.com, Google and others. Theoretically, it could lower how much a business would spend on IT and Muglia is projecting it would save a company 20 percent.
Microsoft is expected to start selling its cloud service Azure in November.
“The movement to cost savings associated with a cloud is primarily a driving down of people costs,” Muglia said. “You move from a world where you have to manage applications 24 hours a day, 7 days a week, to a 9-to-5 day.”
For Microsoft, it would potentially increase sales from each customer, but at a lower profit margin.
When a company deploys a new application, 20 percent of the budget goes toward the software (what Microsoft gets in revenue), 30 percent goes to hardware and the other 50 percent pays for people to manage the software and hardware, Muglia said.
“As we move to a cloud environment, we see this environment shifting and providing better value to customer but also providing better revenue to us,” Muglia said. “The cost to customer drops by about 20 percent. [But] the majority of that cost is booked to Microsoft because we’re providing the software, the hardware and the people. Our COGS [cost of goods sold] goes up but so does our profitability.”