Clarifying the “Cloud first, mobile first” motto, refining it around the concepts of Productivity Platform as being more specific to Microsoft core differentiator is the new positioning of Microsoft. Acknowledging a relative loss of “relevancy” in the device space, especially the smartphone one, this new positionning will allow Microsoft to leverage Google and Apple network externalities built upon Android and IOS.

This new positioning will leverage both Office 365 Business Productivity suite in Software as a Service (SaaS) mode and Microsoft Azure Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) offerings. However there is a price war between Google, Amazon and Microsoft about cloud commoditized services (Compute, Storage) which is cash intensive to set the “Yalta” of commoditized cloud services market share. However, in the long run, those services need to make money (whatever the business model to be associated with).

The issue here is about the positioning of Microsoft in the value chain using these services. I see here two major options which are not exclusive.

1) The IaaS & PaaS commoditized services and the B2B2C model.

Microsoft will rely on its Partner ecosystem of Independent Software Vendors (ISV) to build added-value services on top of its core/basic service layers (IaaS/PaaS). It is key in this case to recruit the maximum of ISV that will develop added business value on top of commoditized cloud services which will in turn consumme the compute and storage offered by Microsoft.

Currently, Enterprise Customers maturity is rather low on PaaS and they mostly consider IaaS to increase their “agility” and ability to quickly deliver business nedded infrastructures. Later on, when DEVOPS approach will be more pervasive, leveraging the ecosystem of PaaS API will be a growth driver for cloud services providers.

Iaas has a genuine issue of low entry barrier excepted it is capital intensive, but with containerization (Docker approach) it will become more of a commodity as time passes by. Ultimately, with the holy grail of “cloud service brokering” it could be possible to have multi-sourcing strategy for your cloud services, being able to “dynamically” change from one provider to another for a basic commodity.

PaaS has higher entry barriers as (excepted for very basic services such as Binary Large Object -Blob- storage) it is tied to the API architecture of the cloud PaaS provider, making it harder to develop a multi-sourcing strategy for your PaaS services.

Either way (IaaS or Paas), Microsoft positioned on the B2B segment (far from the business requirements and value generation) while the ISV will be positioned on the B2C segment, meaning it will handle the business value, business vertical knowledge and the Customer Relationship Management (CRM). Seen from the end-customer, Microsoft will be quite remote or even invisible. The customer here is more likely to be from the Enterprise Segment.

As a consequence of this positioning in the value chain, Microsoft would tend to lose vertical business relevancy (or not gain any) and value, stuck into a position with low margin (outcome of the price war on cloud commodities) which needs to be counterbalanced by high volume. Obviously this will have a deep impact on the cost structure of Microsoft and especially its workforce.

2) The differentiated Business productivity services cloud in SaaS mode and the B2C model.

In that model, Microsoft has a better position in the value chain.

First, Microsoft can leverage its long-term investment in its Office Business Productivity suite and its leadership in that space. Especially, Microsoft can differentiate from other cloud service providers with high-end business productivity services made available across different kind of devices. Moving away from its legacy “Windows First and only” motto, Microsoft is then able to leverage powerful network externalities currently owned by either Google (Android) or Apple (IOS) to route consumers back onto its cloud services.

While technically, reversibility is a key expectation from end consumers, by providing them with the best Business/Personal productivity experience ever, Microsoft could not only attract Android/IOS consumers into its cloud ecosystem, but even lock them in and develop its footprint over consumers’ daily mobile experience in all dimensions of their daily activities.

In that position, Microsoft can develop a stronger relationship with its consumers (who can either be Enterprise Customers or Personal Consumers), be the owner of the Customer Relationship end to end to develop its Office brand impact and consumer loyalty resulting in higher margins.

Conclusions

It is key for Microsoft to execute its strategy in these two spaces (B2B2C through Iaas/PaaS and B2C through SaaS) to transition its legacy business model leveraging these two pillars: Office 365 as a natural evolution of its legacy pricing model factoring its maintenance fee, and Azure as a new space for business model innovation ranging from being a simple cloud commodity provider, to a JV with an ISV or even beyond. To make money out of this, Microsoft has to drive the business value discussion with its ISV partners at least in engaging in co-marketing with the most successful ones (not limited to “powered by Azure” ^^ ), but with a true strategic partnership, leveraging its brand and gaining business insights from its Partner ecosystem. Although a major ISV “flying by itself” might generate high volume of cash (Netflix has chosen AWS in 2010 see here), I do see PaaS space as an opportunity for Microsoft (and others) to assist promising ISV to grow, and possibly make better return out of their strategic relationship than being stuck to solely be a PaaS provider.

Note! For those interested, I wrote a paper about Microsoft Corporate Strategy History for IE Brown Executive MBA class of Corporate Strategy you could find here:IE Brown Excutive MBA – Competitive and Corporate Strategy – The Microsoft case