Microsoft Server and Tools Market Analysis and Future

Microsoft Server and Tools Market Analysis and Future Outlook Team 2

Situational Analysis Follower in Innovation Organizational structure High capital requirements for cloud Diversification Revenue Generator Financial Solidity Nadella’s Leadership Internal SWOT Integration of Cloud Services Competition with Amazon Existing growth potentials Other Competition Service provider Acquisitions Situational Analysis Problem Statement Cloud Market Integration Business Model Structure External Recommendations

Problem Statement 1. 2. 3. Situational Analysis Problem Statement • Cloud Integration • Organizational structure • Cost and Labor Cloud Market Integration Business Model Structure Recommendations

The Competitors Google was the leader in the size of data centers and servers (projected close to 900, 000 servers) [2] • Amazon’s projection of 33% growth to 158, 000 servers [3] [2] Report: Google Uses About 900, 000 Servers Situational Analysis Problem Statement Cloud Market Integration Business Model Structure Recommendations

Cloud Market 250 Cloud Market Projections 200 150 100 50 0 77 2010 110 93 2011 2012 130 2013 160 2014 180 2015 210 2016 Gartner 2013 [1] - http: //www. gartner. com/newsroom/id/2352816 Situational Analysis Problem Statement Cloud Market Integration Business Model Structure Recommendations

The Target Market Microsoft a leader in cloud: IT Pro [4] Small businesses: The unbundled buyers Smaller packages at a time, few licenses, more purchases Support and customization teams required – lifetime value goes up Big one-time investment – loyalty Pay-as-you-go plans[6] Fortune 500 companies: [5] These are the big revenue generators Big packages and software support Long-term contracts Discounted added applications on Azure Need for customization – higher paying client Annual or monthly plans [6] [4] Microsoft Case Study: http: //advertising. microsoft. com/en-us/cl/651/microsoft-cloud-case-study Situational Analysis Problem Statement Cloud Market Integration Business Model Structure Recommendations

One Cloud – The Success Recipe Setback faced due to incompatibility of applications with Azure Compatibility Merging Azure Cloud Services Situational Analysis Problem Statement • Merge Azure into STB • Team collaboration crucial Categories: [7] 1) Execution Models 2) Data Services 3) App Services 4) Networking 5) Store Cloud Market Integration Business Model Structure Recommendations

What’s Required? Universal Compatibility[8] Application Platform Data Layer Modern Data Center

Service License Agreement Contract Terms Cloud-based Services [9] • Three-year term • Billed Monthly • Annual Windows Azure • Pay-as-you-go Subscriptions

Future New Model Recommendation Situational Analysis Integration of Azure Replicate Windows Server 2012 Pay by Product use Customers pay only for what they use Datacenter Maintenance 99. 95% up time Security Prevention from threats and attacks Problem Statement Cloud Market Integration Business Model Structure Recommendations

Making the Model Profitable [10] > 50% • Multi-year volume licensing agreements • Discounts at no additional costs 25% • Transactional volume licensing programs • Retail packaged products • Licensed software products for Original Equipment Manufacturers 20% • Enterprise Services Situational Analysis Problem Statement Cloud Market Integration Business Model Structure Recommendations

Effects of Cloud Promotion Market and sell Azure along with Windows Server 2012 Cannibalization Absence of individual licenses Longer periods of monetization Exchange and Share. Point Situational Analysis Problem Statement Cloud Market Integration Business Model Structurel Recommendations

Three-year Financial Projections Revenues 10% e. y Operating Expenses $2, 894 $16, 352 M $17, 987 M Operating Income Situational Analysis Problem Statement $2, 955 $3, 155 $19, 875 M $6, 756 Cloud Market $8, 099 Integration Business Model $9, 072 Structure Recommendations

Three-year Financial Projections Yearly Projections (in millions) 2011 [11, 12] 2012 2013 Revenues $16, 352 $17, 987 $19, 875 COGS $280(200 K servers @ $70 M/50 K servers [13]) $350 (250 K servers @70 M/50 K servers) $700 (500 K servers @70 M/50 K servers) Gross Profit $16, 072 $17, 637 $19, 175 Sales and Marketing $3, 344 (6% increase of Sales in 2010) $, 3, 410 $3, 648 R&D Exp. $2, 400 (approx. expenditure) $2, 470 (4% increase) $2, 550 General and Admin Exp. $678 (8% increase from 2010) $703 $750 Operating Expenses $2, 894 $2, 955 $3, 155 $6, 756 $8, 099 $9, 072 Operating Income Situational Analysis Problem Statement Cloud Market Integration Business Model Structure Recommendations

Organizational Structure Testing and Engineering Program Management Development Data and Storage Srivastava NOT retained Promote Guthrie [14] Microsoft reorganizes its Server and Tools unit, Zdnet, 2012 Situational Analysis Problem Statement Cloud Market Integration Business Model Structure Recommendations

Internal Organization [10] • Use about 4, 000 employees for Azure Retain Anderson Add a new CVP for Testing and Engineering Testing and quality assurance Promote Laing The rest for integrated product development Internal Structure No Changes to Marketing and Finance Promote Zander Change Kummert’s Title Situational Analysis Problem Statement Cloud Market Integration Business Model Structure Recommendations

The Hierarchy Scott Guthrie CVP Program Management Jason Zander CVP Development Satya Nadella President STB Brad Anderson CVP Program Management Bill Laing CVP Development Ted Kummert CVP Data and Storage New CVP for Testing and Engineering Situational Analysis Problem Statement Cloud Market Integration Business Model Structure Recommendations

Recommendations: Integration Merge Azure in STB to ensure reduction of cannibalization of Windows Server 2012 Allow customization of the platform with other STB products like SQL Servers Partner Licensing includes monthly, annual and pay-as-you-go subscriptions. Situational Analysis Problem Statement Cloud Market Integration Business Model Structure Recommendations

Recommendations: Leadership Not retain autonomous leaders who might interfere with integration Situational Analysis Problem Statement Bring in Scott Guthrie, internally promote and reorganize Cloud Market Integration Business Model Fresh, open minds, new perspectives 4, 000 employees on Azure, add 1000+ employees Structure Recommendations

Recommendations: Business Model Start with startups Move on to acquire Fortune 500 clientele Expand data centers, scale infrastructure 1 M servers by 2013 Multi-volume licensing Enterprise systems Situational Analysis Problem Statement Cloud Market Integration Business Model Structure Recommendations

References [1] Gartner February 2013, http: //www. gartner. com/newsroom/id/2352816 [2] Report: Google Uses About 900, 000 Servers, Rich Miller, Aug. 2011 http: //www. datacenterknowledge. com/archives/2011/08/01/report-google-uses-about-900000 -servers/ [3] Amazon Ramps Server Count 33%, Charles Babcock http: //www. informationweek. com/cloud/infrastructure-as-a-service/amazon-ramps-server-count-33 -/d/d-id/1110660? [4] Microsoft private cloud case study, http: //advertising. microsoft. com/en-us/cl/651/microsoft-cloud-case-study, 2012 [5] Microsoft Customer Case Studies, http: //www. microsoft. com/en-us/server-cloud/cloud-os/customer-stories/default. aspx#fbid=hl 1 V 5 qh. EXEO [6] Microsoft Corporation 10 K, FY 12, Microsoft Corporation [7] Introducing Windows Azure, Microsoft Corporation http: //www. windowsazure. com/en-us/documentation/articles/fundamentals-introduction-to-Windows-Azure/ [8] Interview: With $19 B in revenue, Microsoft’s S&T’s chief says he’s just getting started http: //venturebeat. com/2013/05/20/with-19 b-inrevenue-microsofts-server-and-tools-chief-says-hes-just-getting-started-interview/ [9] Microsoft Corporation MSFT 2013 Q 4 10 -K [10] Microsoft Annual Report 2012, Microsoft Corporation [11] Microsoft Annual Report 2010, Microsoft Corporation [12] Microsoft Corporation 10 K, FY 10, Microsoft Corporation [13] The Cost of a Cloud: Research Problems in Data Center Networks, Albert Greenberg, James Hamilton, David A. Maltz, Parveen Patel, Microsoft Research, Redmond, WA, USA, http: //research. microsoft. com/en-us/um/people/dmaltz/papers/dc-costs-ccr-editorial. pdf [14] Microsoft reorganizes its Server and Tools unit, 2012, http: //www. zdnet. com/microsoft-reorganizes-its-server-and-tools-unit-7000002814/

Additional References [15] Gartner: AWS Now Five Times The Size Of Other Cloud Vendors Combined, http: //readwrite. com/2013/08/21/gartner-aws-now-5 -times-the-size-of-other-cloud-vendors-combined#awesm=~ov. Mtjf. Pcm. IRWq. O [16] Microsoft now has one million servers – less than Google, but more than Amazon, says Ballmer, July 2013 http: //www. extremetech. com/extreme/161772 -microsoft-now-has-one-million-servers-less-than-google-but-more-than-amazon-says-ballmer [17] What is Windows Azure? - http: //www. windowsazure. com/en-us/overview/what-is-windows-azure/ [18] http: //blogs. forrester. com/richard_fichera/12 -09 -05 -microsoft_announces_windows_server_2012 [19] Microsoft moves further into cloud – by Quentin Hardy (New York Times) http: //bits. blogs. nytimes. com/2012/09/04/microsoft-moves-farther-into-the-cloud/? _php=true&_type=blogs&_r=0 [20] Microsoft’s cloud vision: The Next Web http: //thenextweb. com/microsoft/2012/12/13/microsofts-cloud-vision-how-azure-is-the-linchpin-to-the-firms-new-devices-and-services-corporate-strategy/#!vzju. B [21] How Satya Nadella will transform the company , Feb. 2014 http: //venturebeat. com/2014/02/04/the-new-microsoft-how-satya-nadella-will-transform-the-company/ [22] Interview with STB CFO Curt Anderson http: //view. officeapps. live. com/op/view. aspx? src=http: //www. microsoft. com/investor/downloads/events/UBSAnderson. docx [23] Build vs. Buy: Addressing Capital Constraints in the Data Center, Cyrus. One http: //www. ciosummitna. com/media/whitepapers/2013/Cyrus. One_Buildvs. Buy. pdf [24] Earnings Release FY 13 Q 3 https: //www. microsoft. com/Investor/Earnings. And. Financials/Earnings/Segment. Results/Server. And. Tools/FY 13/Q 3/performance. aspx [25] Microsoft Moves further into cloud, New York Times, Sept. 2012, http: //bits. blogs. nytimes. com/2012/09/04/microsoft-moves-farther-into-thecloud/? _php=true&_type=blogs&_php=true&_type=blogs&_r=2 [26] Microsoft Data Center Tab tops $15 Billion http: //www. wired. com/wiredenterprise/2013/02/microsofts-data-center/ [27] http: //www. wired. com/wiredenterprise/2013/02/microsofts-data-center/ [28] http: //www. wired. com/wiredenterprise/2013/02/microsofts-data-center/ [29] http: //www. bloomberg. com/news/2013 -04 -29/microsoft-azure-sales-top-1 -billion-challenging-amazon. html [30] http: //redmondmag. com/blogs/the-schwartz-report/2013/10/microsoft-shatter-financial. aspx [31] http: //www. zdnet. com/blog/microsoft-if-we-dont-cannibalize-our-existing-business-others-will/6841

Questions?

Current Cloud Customers [5]

Iaa. S growth of 41. 3% by 2016, fastest growing public cloud computing http: //www. forbes. com/sites/louiscolumbus/2013/02/19/gartner-predicts-infrastructureservices-will-accelerate-cloud-computing-growth/

Competitors Capital Investment

Financial Calculations Revenues: Revenues in 2010: $14, 866 [6] Calculating a 10% increase in Revenues: $16, 352 Similarly, using the same percentage increase for subsequent years: Revenues FY 11 = $17, 987, Revenues for FY 12 = $19, 875 Expenses Calculation: Sales and Marketing Taking approx. 23% of Sales expenses for STB Sales, in 2010 STB Sales = $3, 154 Extrapolating at a growth rate of 6 – 7% we arrive at the given values

Financial Calculations General and Administrative Taking approx. 17% of G&A expenses for STB G&A, in 2010 STB G&A= $678 Extrapolating at a growth rate of 3 – 6% we arrive at the given values Operating Income = Gross Profit – Expenses Cost of Goods Sold = Cost of Servers According to [13], Cost of 50 K Servers = $70 M = $52. 5 (for servers) + $18. 5 (Infrastructure) For approx. 1 M servers, Phased production Year 1: 200 K Servers = $280 M Year 2: 250 K Servers = $350 M Year 3: 500 K Servers = $700 M