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Robert Mullins

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Microsoft keeping its head in the clouds

CFO Peter Klein pitches cloud, other ideas, at Morgan Stanley conference

By Robert Mullins on Wed, 03/02/11 - 4:49pm.

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Despite all evidence to the contrary, Microsoft still believes it can lead businesses to the cloud and that they'll want to follow. Microsoft, whose stock has been flat for so long that some have taken to calling it a "utility" stock, deperately needs to provide Wall Street a vision that shows the company has a future as big as its past. Although it has not seen mass adoption of its Office 365, Azure or even its freebie Office Live tools, it is still selling the cloud as its savior.

Microsoft Chief Financial Officer Peter Klein told an audience of investment analysts Wednesday that the desktop versions of Office that have been so popular with enterprises and middized businesses will be the ticket to the cloud, not a hindrance. He also said that instead of pocketing savings on hardware, those customers will want to spend more money on cloud software from Microsoft.

"Midmarket companies have the needs of a large enterprise but not the resources and the cloud is perfectly suited to deliver that in a very cost-effective way,” Klein said during an appearance at the Morgan Stanley Technology, Media & Telecom Conference in San Francisco, a three-day long event at which a parade of CFOs and other executives from numerous companies provide financial insights and forecasts of their businesses.

Microsoft Office already probably enjoys strong penetration in midmarket businesses, but not so much it’s new cloud version Office 365, or related cloud offerings such as SharePoint and Lync, Klein said.

“[The cloud] really opens us up to new revenue streams that we haven’t had access to before. And not simply the revenue you get from delivering the service,” he said, adding that Microsoft also has the opportunity to capture some of the IT budget that customers would have spent on hardware that, by going to the cloud, they don’t have to spend.

It was one year ago this week that CEO Steve Ballmer delivered his "We're all in" State of the Cloud address at the University of Washington-Seattle, laying out the company's strategy.

In about a 45-minute presentation this morning, Klein provided few specific figures but a lot of buzz terms like “huge opportunity,” “exceeded expectations” and “growth engine.” He covered topics from Windows 7 adoption to the Nokia-Windows Phone 7 deal to the shakeup in the server and tools business.

Bob Muglia was removed in January as president of the server and tools business, which is responsible for the Windows Server OS, the Hyper-V virtualization hypervisor, the Azure cloud version of Windows Server and related products. Muglia, who will leave Microsoft altogether by summer, was replaced in February with Satya Nadella, a 20-year veteran of the company who ran its online division and helped create the new Bing search engine.

In explaining the shakeup, Klein said Ballmer’s strategy is to “make sure we have the right leaders" running every one of the company’s divisions.

“Bob did a wonderful job with the server and tools business,” he continued, but said that as that business moves with the rest of the software industry to the cloud, Ballmer felt the unit needed someone with cloud experience at the helm. “Satya is a wonderful leader, he’s a wonderful technology leader and he’s a wonderful business leader.”

Briefly on other topics, Klein said corporate migration to Windows 7 is going faster than migration to other operating systems in the past. While that's similar to Klein's report from the Microsoft earnings call on Jan. 27, other evidence shows that migration to the new OS still takes some time. Klein also noted the adoption of Windows 7 in the growing tablet computer market, but said little about Windows 8 beyond what the company said at CES.

Asked about Microsoft’s merger and acquisition strategy going forward, Klein pointed to the search advertising deal with Yahoo and the recent decision by Nokia to sell smartphones running Windows Phone 7 as strategic moves on the order of acquisitions.

“The Yahoo partnership and the Nokia partnership are very significant transactions and to some degree they have a lot of the same characteristics -- if not economically, certainly operationally -- of a large acquisition,” Klein said.