Microsoft courts growth in the cloud – first must contend with squeezed profit marginsThe cloud is one of the hottest buzzwords in the business world, and Microsoft is pursuing growth within the emergent industry as it endeavors to compete with Google and Amazon.

The Seattle, Washington-based company is learning, however, that before it profits from the cloud, it will first have to spend significantly. Bloomberg reports that Microsoft's foray into the cloud will likely bolster long-term revenue, but it will initially hurt the company's profit margins.

Microsoft's new cloud service enables companies to host data on its remote servers. Google, Amazon and Apple are all firmly entrenched in cloud technology, and Microsoft is late to the game, but the tech company is expected to become a powerful player within the industry. First, though, shareholders will likely balk as the company spends significantly to develop such a system.

Microsoft will likely have to offset the substantial amount of resources it is putting behind its cloud segment by implementing a business cost reduction program. What's more, the company will have to overhaul spend management and indirect spend as a means of fighting a projected dip in profits.

Microsoft's cloud division – along with a number of other expenses related to its acquisition of Skype and continued investment in the personal computing, search and mobile markets – will likely cause the firm to miss profit estimates for the fiscal 2012 year, according to Goldman Sachs analyst Heather Bellini. Bloomberg reports the crimp in profits could become the new normal for Microsoft, which is accustomed to reporting outsize profit margins.

"Nothing will ever be as high as the old model," Wells Fargo analyst Jason Maynard told the news provider.

Microsoft's profit margins were squeezed in 2011, falling to 22-year low. The company has aggressively courted growth through mergers and acquisitions, and it has spent heavily on its Bing search engine technology. However, while company chief executive Steve Ballmer is confident such moves are positioning the company for long-term success, in the interim they are hurting its profits.

In the past, Microsoft successfully developed its Windows operating system, selling the software to companies, government agencies and computer owners. Its open approach to software enables it to penetrate the personal computing market, and its initial investment into the development of each iteration of the operating system accounted for its largest expense.

Nevertheless, the cloud computing sector is an entirely different beast, and one that requires a substantial amount of money. Microsoft will need to host data and services for customers, and that will require the installation and development of new technologies. Electricity sourcing could help reduce the expenses associated with running cloud computing warehouses, but Microsoft lags behind its competitors in the sphere and will spend heavily – and quickly – in an effort to catch up.

How much, though, will Microsoft need to spend? Estimates vary, but Sanford C. Bernstein analyst Mark Moerdler contends the firm will use between 15 percent and 25 percent of revenue to cover cloud-related costs. Such a figure is 10 percent higher compared to the profit margins accrued on the prepackaged software that historically has been the company's bread-and-butter.

Microsoft, along with nearly all other technology businesses, has faced a challenging year. Flooding earlier in the year in Thailand hurt hard drive production, and the 9.0-magnitude earthquake and subsequent tsunami that battered Japan in March eroded demand in the short-term in the country. A tepid worldwide economy also prompted many businesses and government organizations to scale back new purchases, hurting sales of Windows.

Microsoft is taking a risk by aggressively entering the cloud sector, but investors and executives hope it will ultimately prove to be a successful one.

Share To:

Strategic Sourceror

Post A Comment:

0 comments so far,add yours