Microsoft Azure’s “mega-deal” customer wins with the likes of AT&T, Chevron, Walgreens and Walmart are being driven not only by back-office cloud work but increasingly tier-one workloads that are core to the Fortune 50 company’s businesses, according to Jason Zander, who leads the teams building Microsoft’s intelligent cloud and edge.
Azure’s executive vice president sat down yesterday with Karl Keirstead, a senior equity research analyst covering software for Deutsche Bank, which was hosting its annual technology conference in Las Vegas. In addition to the No. 2 cloud computing provider’s large customer wins, the duo touched on opportunities arising from the end of support for SQL Server 2008 And Windows Server 2008, the competitive cloud landscape and where Oracle fits in, cloud pricing, Azure’s impact on component manufacturers including semiconductor chip makers and cloud security issues.
Zander, who joined Microsoft in 1992, moved to Azure in 2012 to work for now-Microsoft CEO Satya Nadella, who then was running the company’s cloud computing division.
“At this point, my team does everything from data centers to all the software involved plus silicon, all the way up to the crazy stuff like quantum computing,” Zander said. “It’s kind of a dream job being a systems engineer in the middle of a big inflection point. Lots of fun.”
For the fourth quarter that ended June 30, the second-ranked hyperscale cloud provider reported $11 billion in revenue for its commercial cloud division, which includes Azure, SQL Server, Windows Server, Visual Studio, System Center, GitHub and enterprise support and consulting services. Azure, which Deutsche Bank estimates is a $13 billion business, grew 68 percent.
“The fun thing for me…is we’re working with a lot of companies on their digital transformation.,” Zander said. “We have industries that are shifting as we speak. They’re looking for a trusted tech provider, so it gives us an awesome opportunity to both build that technology base.”
Azure continues to benefit from information technology spending by businesses that want to become more agile in their delivery, but need to do so on a tighter budget, according to Zander.
“The value that we have with the cloud is this kind of hyperscale capabilities that …allows you to run those workloads,” Zander said. “I can run them at a far cheaper benefit. I can actually start having the cloud do tasks that I’m otherwise paying my own personnel to do. That actually frees them up, and that budget you can apply towards the innovation agenda.”
Tier-One Workloads And Azure ‘Mega-Deals’
Azure has been landing a number of very large “mega-deals” with Fortune 50 companies that are driving its growth, including AT&T, Chevron, Walmart and Walgreens.
“You’re starting to see us deploy for this type of technology increasingly in tier-one workloads — the things that are the most core to a business,” Zander said. “Obviously, we do a significant amount of work when it comes to the back office. But if you look at these tier-one workloads, they run the business itself. So, generally, when you see those very large deals, you’re seeing us also integrate and supply technology and partner very deeply with that. You need that kind of structural advantage of the cloud and the edge.”
The bulk of Azure’s business is highly focused on its work with enterprises that have existing workloads that have been running in their own data centers or leased data centers for a long time, according to Zander.
“They want to have a better position on their capex (capital expenditures), and they want the agility associated with that, so it’s very frequent that we’ll start off by doing some level of migration,” Zander said. “I can run it more cheaply and get the agility in there. And then we move into the innovation.”
With Chevron, a very “forward-leaning” company, a few initial workloads transitioned to hundreds.
“Once we got there, we started doing more innovation, to the point where we’re doing IoT (internet of things) for upstream oil and gas exploration, looking at seismic and other things as well,” Zander said.
Workload migration paces depends on where a company is in its digital transformation and whether they’re leveraging partners who can help them move quickly, Zander said.
“A lot of companies are using this move as an inflection point,” Zander said. “In some cases, I want to do a little bit of cleanup. Maybe my portfolio is made up of a bunch of (merger and acquisition) activity, maybe I’ve been waiting for a while to figure out how to do some work. I’m actually factoring that into the process, which isn’t really about migration, but it is around how do I actually get the right kind of trajectory.”
Enterprises also want to ensure their own workers are skilled in the cloud.
“You could come in and have a partner and Microsoft help you move stuff very quickly, but if the personnel that you have have not yet come up to speed on how cloud operates, they can’t take full advantage of it,” Zander said. “When the first few workloads go, and you got people that are trained and they know how to do it, all of a sudden, they’re kind of like, ‘Why isn’t the rest of the stuff running here?’ and we see the usage is starting to spike.”
How Recession-Proof Is Azure?
Azure’s never been through a period of slower economic growth, because it only recently really started to scale and wasn’t a material business during the economic recession of 2008 and 2009, noted Keirstead, who asked Zander how recession-proof it would be based on its work with industries or companies that have stumbled.
During downturns, the question of using the cloud comes back to cost-savings and evaluating capital expenditures such as leases for data centers, according to Zander.
“Being able to change how your balance sheet gets laid out when those things occur is actually important,” Zander said. “Then it really comes down to the partnership — what’s our role, what’s our partner ecosystem’s role…to help make sure that someone can realize that. At the end of the day, if you’re going to be more agile, and if I’m going to save money on the run rates, then what I’ve seen by and large is companies are actually quite interested in still making those moves.”
SQL Server 2008 And Windows Server 2008
Microsoft ended extended support and regular security updates for SQL Server 2008 in early July and will end extended support for Windows Server 2008 operating system on Jan. 14, 2020. Customers have the option of staying on-premise and upgrading to new versions or migrating their instances to the Azure cloud.
Zander has oversight of SQL Server and Windows Server and runs Azure cloud on top of that technology, he said.
“If you’re going to consider the cloud, it makes a lot of sense,” he said. “The question that I often get is, ‘How do I get to a point where I’m not having to do this every couple of years? Because if I don’t move too far ahead, then I’m going to be, once again, coming back, and I’m having to do the upgrades, I’m having to apply my own personnel in order to actually do the work. How do I get to a better state?’ The cool thing about the way we have set this up is with our hybrid benefits.”
Moving to Azure is about five times cheaper than running SQL Server and Windows Server on top of the Amazon Web Services (AWS) cloud, according to Zander.
“It’s much more financially viable to be able to do that,” he said. “Licensing is great. You don’t have to repurchase your IP (internet protocol). I get that kind of flexibility that’s there. That’s what the hybrid use benefits are for. At the same time, I can also move to an evergreen state, which basically says, ‘Hey, the difference in the cloud is that with these managed instances, we can actually keep you up to date on the latest version of the database. And, by the way, a lot of things that you’re having to hire people to do, like your backup and your maintenance and stuff like that, the service in the cloud just does that for you.’ This is playing out very, very hard right now.”
Microsoft’s product work – including its hybrid cloud and edge work – is a differentiator for Azure when it comes to competing against AWS and Google Cloud, Zander said.
“Azure IoT is an awesome example,” he said. “We’re doing 6 trillion messages a day on IoT, over 70 industrial customers. It’s amazing. In data and analytics, we’ve got Spark. We’re the only ones with a first-party Azure Databricks solution. These guys invented Spark. More broadly, we’re able to do one other thing, which is we have decades’ worth of DNA, especially for enterprises, on how to go run all these businesses. You’re probably already one of our customers, which means we can help you with that journey.”
Azure also is seeing a lot of business from enterprises that are bypassing the other cloud providers because they have competing businesses, according to Zander.
“To me, it’s weird that you would, on one hand, go pay a vendor to go help you with the cloud and, on the other hand, they would turn around and compete with you,” he said. “And that is generating a lot of questions. It’s a weird boardroom conversation. ‘Yeah, I spent hundreds of millions of dollars on this vendor and, yeah, they are our No. 1 competitor going forward.’”
Cloud Price Discounting
With No. 1 AWS, Azure and No. 3 Google Cloud “duking it out” for large deals in the last four or so years, Keirstead noted that analysts have worried that the incentive to price-discount is huge once a provider lands a big customer on their infrastructure.
But, Zander said, “The first comparison to start off with is not even how are the cloud vendors duking it out, but also what’s the cost between what I’m already doing and what I need to be doing? I’m already going to wind up saving money.”
Azure also is investing very heavily in innovation around improving margins, costs and getting more efficiencies, according to Zander.
“We’re very relentless at doing that work,” he said. “I also think in infrastructure that there’s absolutely opportunities and a strong business. When you buy millions of things at a time, you can afford to make that in a good kind of positive business-structured way.”
The ‘Three-Horse’ Cloud Race And Oracle
The cloud landscape currently is a “three-horse race” between AWS, Azure and Google Cloud, with Oracle in fourth place, Keirstead said.
“Oracle’s knocking on the door and wants to be part of the party,” he said. “When you’re bidding for these large deals, how often are you seeing Oracle at the table considered as an alternative?”
When it comes to hyperscale clouds, there’s a significant amount of infrastructure work needed, so typically Azure’s competition is “often a Seattle competition,” Zander said in an apparent reference to Seattle-based AWS.
Microsoft and Oracle in June announced they’re linking their clouds to allow joint customers to migrate and run their enterprise application workloads across Azure and Oracle Cloud.
“We’ve got additional things coming up, so you see that that’s a great combination,” Zander said. “Obviously, a lot of Fortune 100 firms heavily bet on Oracle. They’ve got great solutions there that they’re trying to go run on top of. And, of course, that’s why we want that partnership with Oracle — to make that go.”
But, Zander said, “When I think of the worldwide footprint and a lot of the companies we deal with, they want to be everywhere.”
Microsoft this week announced the availability of Azure from its new cloud regions in Germany following the addition of regions in Switzerland in late August, bringing it to 56 regions worldwide.
“That kind of global coverage, that kind of completeness of that portfolio, that’s where I see people most interested in what that future looks like,” Zander said.
Azure And Component Manufacturers
Microsoft is in a very unique position these days, where a lot of the buying activity for the data center supply chain is now aggregated in a couple of companies in cloudy Northwest parts of the country, Keirstead said.
“You’ve got amazing purchasing power, and so everybody watches your CapEx now like they weren’t five years ago,” he said, noting that several Azure suppliers, including semiconductor chip maker Intel, blamed recent demand pressure on hyperscale cloud buyers holding back on investments.
“Is that because you’re anticipating slower Azure growth, or is it because you’re finding replacement technology?” Keirstead asked. “Are you finding efficiency improvements?”
Zander replied that Azure’s growth speaks for itself, and Microsoft has guided that it plans $5 billion in capital expenditures this coming quarter.
“A lot of the CapEx is going towards that additional (data center) expansion, so we can get off into more markets and continue doing things like that,” Zander said. “Obviously, the components that we buy and the servers and the fleet that we continue to expand is a core part of that. We are pushing relentlessly for efficiencies, because this is a high-scale game, which means you have to be doing a really excellent job on every dollar that I spend. We’ve tuned our supply chain. Our lead times are starting to shrink, so we can get more into kind of a ‘just-in-time of when I need it, when can I deliver it,’ making sure that we’re meeting all the demands that we have while not having to carry a lot of excess capacity.”
“In addition to that, we’ve made a lot of software improvements…so we can do better jobs on density,” Zander said. “I can host more workloads on the existing kit that I’ve already bought.”
Keirstead, noting that Silicon Valley engineers have anecdotally told him that Azure has been able to “squeeze like 3X more out of a server rack today versus 18 months ago,” asked Zander how Azure is driving those efficiency gains.
“It is a combination of silicon design work that we do,” Zander said. “We work very closely with our components partners. It’s about storage, the work we’ve done with the chip manufacturers. We also do a lot of specialization that is designed for the cloud in partnership with them, and that actually helps us do a good job getting even more efficiency. A lot of the additional work that we do is things like…how much RAM (random access memory) should I have, how much flash drive should I have? We’ve been able to, over time, look at the workloads that people are running, how to get the right mix between them. This is a little the secret sauce, but I can start actually tuning the fleet.”
Security And Hotlines To AWS And Google Cloud
Microsoft’s biggest hacking period every year is the evening of Dec. 24, when gamers are unwrapping their new Xboxes, according to Zander, and hackers want to claim they’ve actually taken down a network and prevented kids from playing their games.
“We spend a billion dollars on opex every single year just on security,” Zander said. “There’s over 3,500 people that work on that. There’s always a lot of scrutiny, and there should be on security. It’s especially true as more and more of the tier-one workloads start to shift into the cloud.”
“From a shared security perspective, I actually think as cloud vendors, we’re all vested in making sure everyone is safe and secure on the cloud,” Zander said. “If you get to the point where people worry that the cloud in general is not a good place to go, then whether it’s one vendor or another, that could be problematic for the overall business. Even when we’ve had major attacks that have occurred, that impact all of us, we actually have a hotline to Google, we have a hotline to Amazon. Our security folks will talk to each other to figure it out, because we think that’s kind of the greater good. That should really trump some of the competition around things like that.”
All of the security work that Microsoft has done for Office 365 for 15 years is built into Azure, which has built on top of that, according to Zander.
“This also has to be a partnership with the customer who’s running the workload, because I can secure the environments and I can help them with tools and make it much, much easier, but at the end of the day, they also have to apply those security best practices to their workload to make sure that they remain secure,” he said.
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