Cloud computing creates new problem for Microsoft
December 27, 2011
Microsoft’s current thrust in the cloud computing sector is believed to have helped Microsoft compete better with market leaders Apple and Google. However, it is speculated that a dipping profit margin will act as a deterrent and restrict this expansion. Microsoft’s cloud computing services lets corporates manage spread sheets and websites stored on Microsoft’s server in return for a subscription payment. Recently expanding its offerings, the services now allow customers to edit photos online and stream TV shows.
Though highly customer friendly, the cost of maintaining the software in its own data centre and server costs along with other expenses have resulted in the company missing its profits estimate for 2012, warns Goldman Sachs’ analysts Heather Bellini. Jason Maynard from Wells Fargo Securities said that Microsoft may not be able to produce outsized margins like before. This change in the profit scenarios arises from CEO Steve Ballmer’s decision to capitalize new investments like increasing Xbox features and most recently, acquiring Skype for over $8 billion…
Current profit margins of the software giant are at a 22 year low, and are definitely going to drop further. Gross margins, the percentage value of sales remaining post accounting for production cost, is expected to come to 76%, a 1.6 point drop. It already saw a 2.4 point drop in 2011.
With more and more users using cloud software, there will be increased pressure on Microsoft’s servers, especially since the onus of cost of storing and operating the programs falls on Microsoft. Traditionally, selling developed packaged software didn’t cost Microsoft much to manufacture or distribute. However, the expenses that come with shifting businesses to the cloud include housing, power, cooling, and keeping the data servers up and running; costs which quickly pile up.
Analysts from Sanford C. Bernstein & Co. have evaluated that the cost of cloud computing will vary from 15 to 20 per cent of Microsoft’s revenue. Bellini from Goldman Sachs further said that analysts may have overlooked a rise in cost of goods sold in the fiscal year, which would also stop Microsoft from reaching its goal. Microsoft didn’t respond to queries. Furthermore, this pressure on the margin is creating doubt among some of the investors, and this is being reflected to some extent on share value. Microsoft’s share stands at $26 in December, and has declined by 6.8% in the current year.