SWOT: Microsoft, Private Cloud Offering, Worldwide
As it strengthens its private cloud offering, Microsoft must show that it is more than a follower and an alternative, and focus on managing heterogeneity and executing its Cloud OS strategy.
Table of Contents
- SWOT Analysis
- Implication for Company Being Profiled
- Recommendations for Partners and/or Competitors
- Company Overview
- SWOT Analysis
Microsoft's private cloud offering has been gradually evolving in recent years, as the company aims to close the gap with market leader VMware and, to a certain extent, BMC. In early 2012, at its Private Cloud Day, Microsoft demonstrated how customers could use Windows Server 2008 R2 and System Center 2012 to build private clouds. In April 2012, the company introduced System Center 2012 Service Pack 1 (SP1), which has improved the management capability for Windows Server.
During the last five years, enterprises' route from virtualization to cloud computing has changed substantially. Nowadays, end-user organizations' increased interest in the private cloud usually starts when they have reached a tipping point of 70% server virtualization; service delivery is another driver behind the implementation of private clouds. For many companies, a private cloud is the next step after virtualization, a trend that highlights a growing market (for more information, see "The Road Map From Virtualization to Cloud Computing").
Microsoft has already established a strong presence as an infrastructure software provider and has built out its management suite to complement this position. The company's unique approach to licensing makes it relatively easy for enterprises to use its management solutions. And although Gartner believes that Microsoft is not known as a best-of-breed company in any specific category, its "good enough" approach is promising. Bolstering this strategy with a strong partner program for "add on" solutions means that enterprises can use Microsoft's platform as a basis and then choose specific solutions to enhance it. Compared with many of its competitors, however, the company is a relative newcomer to the private cloud. Nevertheless, Microsoft has added a hundred more reference customers to its online database (although not all of them qualified as private cloud case studies),1 and its improved offerings are different enough from its rivals' to make it a serious contender in the market.
Essentially, Microsoft's private cloud offering consists of Windows Server 2012 and the System Center 2012 SP1 product suite. This report focuses on these two offerings, and analyzes how well Microsoft is likely to fare in the market for private cloud solutions.
Figure 1 shows the strength, weakness, opportunity and threat (SWOT) characteristics pertaining to Microsoft's private cloud offering, based on Gartner's SWOT rating model. Table 1 summarizes the individual SWOT findings.
Source: Gartner (August 2013)
SMB = small or midsize business
Source: Gartner (August 2013)
Microsoft provides competitive management solutions at an attractive price point, mainly for its own environments. So far, the company has tried to closely match VMware's private cloud product stack, or surpass it, in terms of hypervisor functionality, operation management, orchestration and configuration management, although its support for VMware clouds is, we believe, unproved.
Microsoft has also simplified the packaging and licensing of its private cloud product line. Both Windows Server and System Center are available in a single SKU, called Enrollment for Core Infrastructure, which can be purchased in either a Standard or a Datacenter edition. Both editions have the same capabilities; their only difference is in the scale of virtualization. The Standard edition provides customers with two virtual machines (VMs) per license, while the Datacenter edition provides unlimited virtualization.2 Microsoft has also simplified its Software Assurance by removing all "a la carte" options. All these changes make end users' choice of cloud management solutions easier.
Microsoft's first-generation cloud management platform (CMP) with System Center 2012 is made up of a variety of mature solutions (such as OpsMgr and ConfigMgr), as well as new functionality that ties all the system center tools together. New functionalities, such as System Center App Controller and System Center Service Manager, are exactly the ones that enable the product's cloud capabilities, along with System Center Orchestrator. The company has also made significant enhancements to OpsMgr and ConfigMgr. The latest System Center 2012 SP1 includes the capability to control Windows Server Hyper-V. Pairing Operations Manager's full five-dimensional application performance monitoring support for .NET with Orchestrator gives the suite visibility and action-oriented workflow.
Like VMware, Microsoft continues to streamline its management solutions to address the requirements of private and public clouds. It is also introducing more infrastructure management into its hypervisor, making its "stack" a more cohesive offering.
Microsoft's partners, in our interactions with them, have been positive about their working relationships with the company. In most engagements, Microsoft has taken a very hands-off, partner-led approach, in which its partners play a major role in selling and serving customers. It is also capitalizing on several partners' unhappiness with VMware — especially their dissatisfaction with the limited capabilities of vCloud Director.
Microsoft also has a Private Cloud Fast Track program, which aligns its hardware partners, including Cisco, EMC, NetApp, Hitachi, Fujitsu and NEC, to deliver preconfigured solutions to reduce the risk and complexity of implementing private cloud offerings. Microsoft also has a strong service lineup that includes system integrators such as Dimension Data and HP Enterprise Services. Microsoft's partners maintain that its solution provides an alternative that means they can rely less on VMware, and it gives end users a choice in how they manage their environments. This follows on from Microsoft's existing partner ecosystem, in which partners can include extra value in terms of add-on solutions and design and implementation. For Microsoft, the cloud extends its partners' opportunities (particularly for cloud services providers and independent software vendors), something that so far has not been one of VMware's strengths.
Microsoft's recent organizational restructure highlights its combined approach to Windows Server and Windows Azure within its Cloud and Enterprise Engineering Group. Along with the System Center suite, these products now form part of a shared vision for the enterprise cloud, known collectively as "Cloud OS," which integrates Microsoft's on-premises Windows Azure with service providers' Microsoft platforms.
An inherent principle of Microsoft's Cloud OS vision is innovating in the cloud infrastructure layer faster and at greater scale, and then bringing these developments to the company's on-premises offerings. This approach reflects a subtle but increasing trend, whereby enterprises look to leverage the best Web-scale cloud environments inside their on-premises data centers. And, as such, it can be seen as a move from the "outside" (public cloud) to the "inside" (on-premises).
From a technology perspective, Windows Azure is now underpinned by Windows Server 2012 and the same version of Hyper-V that is available to Microsoft's customers, strengthening hybrid interoperability between its on-premises and cloud offerings.
Microsoft also has flexible licensing for its cloud offerings, which covers partial software licensing in the public cloud (or license mobility). Microsoft's Volume Licensing customers that have eligible application server licenses covered by active Software Assurance can elect to use License Mobility through Software Assurance. These companies can deploy certain server application licenses, purchased under a Volume Licensing agreement, to Windows Azure. However, Windows Server (or VM) is licensed for use in Azure with a per-minute charge, so license mobility is available only on a pay-as-you-go basis.3
In terms of enterprise applications, Microsoft and Oracle have worked together to certify Oracle software running on top of Windows Server Hyper-V and Windows Azure. Oracle customers' new license mobility means that they will also benefit from being able to run their Oracle software licenses in on-premises Windows Server and Windows Azure implementations. Microsoft will add Infrastructure Services instances with Java, Oracle Database and Oracle WebLogic Server to the Windows Azure image gallery. In addition, Oracle will enable and support customers with Oracle Linux images on Windows Azure, by offering Oracle Linux, with a variety of Oracle software, as preconfigured instances on Windows Azure.4 This will advance Microsoft's position as a provider that takes an application-centric approach to private and public clouds.
Although Microsoft has closed most functionality gaps with VMware in terms of x86 server virtualization infrastructure, it took five years to achieve. Still, management and automation gaps on top of the virtualized infrastructure remain. Notably, VMware's Site Recovery Manager is more automated and better-suited for large-scale disaster recovery requirements. Compared with VMware and many other vendors (such as BMC for cloud management, say), Microsoft is often late to market with its hypervisor and cloud management solutions, so it tends to be viewed as a follower rather than a leader. Its lateness to market and the historically slow pace of its product releases could overshadow its market leadership and prevent it from outrunning its major competitors. The concepts embedded in Cloud OS would appear to be the company's latest attempt to address this.
Other examples of its lagging nature include the late availability of live migration and the fact that System Center couldn't manage Hyper-V until SP1 was made available. Unfortunately, the perception of lateness and being a secondary alternative cannot be changed easily in this market.
According to Gartner research, Microsoft's private cloud offering has only 58% of Gartner's required criteria for CMPs (see "Microsoft System Center 2012 SP1: In-Depth Assessment for Cloud Management"), compared with VMware's vCloud Suite 5.1 Enterprise edition, which meets 68% of the required criteria (see "VMware vCloud Suite 5.1: In-Depth Assessment"). The areas in which Microsoft are weak include a lack of tight integration of third-party management tools; inconsistent support of Linux and Unix across management modules; and no chargeback, capacity management or connectivity with a broad range of external clouds.
VMware remains the leader in x86 server virtualization infrastructure. Gartner research undertaken in June 2013 shows that the proportion of organizations running Hyper-V remains significantly lower than for VMware vSphere (23% versus 84%, respectively, when combining primary and secondary vendors). The relative lack of functionality in the early versions of Microsoft's Windows Server 2008 Hyper-V meant that most IT organizations chose VMware when they considered virtualizing their x86 servers. The result was that Microsoft's installed base of the server virtualization market was considerably smaller than VMware's.
With the availability of Windows Server 2012 Hyper-V and System Center 2012, Microsoft has improved the functionality of its x86 server virtualization, even beating VMware in some areas, such as clustering on physical and guest servers. Nevertheless, according to Gartner's inquiries, most customers still regard VMware as the first choice for server virtualization, with Microsoft second. For end users, x86 server virtualization is usually fundamental to implementing private clouds. So IT organizations, when looking for a private cloud solution, generally evaluate a particular vendor's offering based on its server virtualization infrastructure capability, as well as its management capability. This is likely to have a negative effect only on Microsoft's private cloud business until it can significantly increase its market share and/or disrupt the market in other ways (such as with the hybrid cloud).
In addition, because System Center 2012 SP1 was released in April 2012, Microsoft's installed base for private cloud management is significantly smaller than that of its competitors. The market for CMPs began to emerge in 2010, as VMware and other vendors started to offer solutions. For example, BMC Cloud Lifecycle Management is already on its third version, and it has gone beyond the pilot stage to become production deployments. So not only does Microsoft have to compete with its main rival VMware in this market, it also has to face private cloud management solutions from five different categories of vendor (see "Cloud Management Platform Vendor Landscape"):
- Software stack vendors
- Hardware/fabric vendors
- The big four operations management vendors (IBM, CA Technologies, BMC Software and HP)
- Open-source software vendors
- A plethora of emerging point solution vendors
This is a crowded and rapidly shifting marketplace (see "How the Cloud Management Platform Market Shakeout Will Affect Buying Decisions"). As a late entrant to the CMP market, Microsoft will have to gain credibility quickly and prove its enterprise-class capability.
Microsoft's private cloud offering has been developed and optimized mainly in Microsoft environments, and Gartner believes that the company has consistently provided limited support for non-Microsoft environments. The new System Center 2012 SP1, for example, still provides inconsistent support for managing Unix and Linux as well as VMware clouds. Although Microsoft has added some basic capabilities to support non-Microsoft platforms in the latest release of the solution, other products will often be needed for sophisticated heterogeneous environments.
Microsoft's suite of private cloud offerings provides basic capability that is likely to be "good enough" for Windows-centric buyers, particularly SMBs and those enterprises that regard themselves as "aggressive" in terms of their buying behavior. But it is not feature-rich or integrated enough for most multiplatform management environments. We have yet to see Microsoft demonstrate that it can manage heterogeneous environments between different OSs, hypervisors and platforms. We believe that this inward approach prevents Microsoft from making greater inroads into large enterprises, which often don't like to tie themselves to a single vendor, preferring to diversify to ensure they have a balanced choice of providers. Microsoft's relatively poor record in managing heterogeneity could put it at a disadvantage when competing in the large-enterprise market with emerging vendors and tools that have this capability.
Gartner's polls and inquiries highlight a growing interest in hybrid cloud computing among enterprises, especially for infrastructure as a service (IaaS) solutions. Most IT organizations regard hybrid cloud infrastructure as the future of their data centers. To transform data centers into hybrid clouds, users need virtualized infrastructure and private cloud management platforms, as well as integration with public cloud services.
While Hyper-V has helped Microsoft make inroads into on-premises virtualization in recent years, the company has also worked to adjust the course of its Windows Azure cloud service. Starting in 2008, primarily in the platform as a service (PaaS) market, Microsoft has more recently moved to include IaaS as a key offering, and it has now standardized on the same version of Hyper-V available in Windows Server 2012. We have seen a small but increasing number of organizations begin to explore Windows Azure — in the order of 5%, according to the results of Gartner Research conducted in June 2013. This result was second only to Amazon Web Services. But it increases if other Microsoft cloud services aimed at enterprise infrastructure (Exchange and SharePoint) are included. Similarly, Microsoft has also continued to expand Azure's global points of presence, thus expanding its market opportunity.
As interest in hybrid cloud infrastructure grows, Microsoft can help many enterprises move to hybrid clouds, via its solution portfolios that include Windows Server 2012 Hyper-V, System Center 2012, Windows Azure Pack and Windows Azure. Microsoft is one of only a few vendors that have whole solutions for virtualization, private cloud offerings and public cloud services. Compared with offerings from competitors such as VMware and Citrix, Microsoft's solution portfolios can give it a competitive advantage, and they position it well for hybrid cloud scenarios.
Microsoft's long-standing presence in emerging markets will create opportunities for its private cloud offering. Until 2015 at least, Europe's share of server virtualization will continue to decline (more specifically, the percentage of total virtual OS instances in Gartner's forecasts will decline). Overall, Western Europe will continue to dwarf Eastern Europe, but both are expected to increase by a similar absolute amount during the forecast period. Microsoft has also achieved higher usage of Hyper-V in Europe than in North America (19% versus 10%, respectively).
As mature markets become increasingly saturated, growth in server virtualization is likely to happen in emerging markets in Eastern Europe, Latin America and Asia/Pacific. Taken together, Asia/Pacific and Japan represent the greatest opportunity in terms of forecast growth in virtual OSs (see Table 1). They also have lower levels of virtualization compared with North America and Europe.
Source: Gartner (August 2013)
According to Gartner's research, end users in China expect big increases in virtual OS shipments in 2013. We also expect significant increases in Japan (from a relatively small base), a market traditionally dominated by Unix and mainframe servers for critical workloads (and which as a result has been generally slower to adopt virtualization). Similarly, we expect new virtual OS shipments in Eastern Europe and Latin America to eclipse those in Western Europe by 2017.
Microsoft's presence in emerging markets means it can tap underpenetrated sectors better with its virtualization solution than with its private cloud offering.
Microsoft's private cloud offering is particularly suited to the midmarket, which requires cost-effectiveness and good-enough functionality. Microsoft's mind share among midsize organizations has traditionally been strong, and Windows Server is the dominant OS in this market. Microsoft can use this advantage to expand its private cloud offering. In fact, Gartner research conducted in June 2013 shows that penetration of Hyper-V among SMBs is three times higher than among larger organizations globally. For most SMB clients, Windows is the predominant server platform, and although many SMBs have implemented VMware for their hypervisors for virtualization and the cloud, their focus is still on cost-effectiveness. So they would be willing to shift to Hyper-V and/or leverage management tools that focus on their Windows VMs.
Simply in terms of logistics, Microsoft is often a better fit for midmarket rather than larger enterprises, where broad heterogeneity (both hybrid cloud and platform) will be required. We have advised clients not to deploy System Center 2012 SP1 in large-scale private cloud implementations (more than 10,000 managed catalog objects),5 which implies that, although Microsoft has difficulty penetrating large enterprises, it is well-positioned to serve midsize customers.
A recent Gartner survey shows that one-third of organizations are using an alternative hypervisor for a variety of reasons, such as cost, pricing or licensing, workloads (applications, database and desktops), and choice of OS.
Gartner believes that enterprises are looking for choices and will diversify to ensure they have a balanced portfolio of vendors. Many are already testing and adding Hyper-V, despite VMware being their main choice.
We believe, therefore, that the ability to manage heterogeneity, including multihypervisors and multi-OSs and platforms, will become a critical capability for vendors. This opportunity is not exclusive to Microsoft. And, we believe, given Microsoft's weakness in managing heterogeneity, it is not well-positioned for this opportunity in the market. In fact, we believe that this opportunity could turn into a serious threat if Microsoft misses out on it. In effect, the company risks losing the entire heterogeneous management market if it does not act timely and quickly with the right strategy.
Gartner research conducted in June 2013 shows that VMware is used by about 85% of organizations. VMware was a Leader in our "Magic Quadrant for x86 Server Virtualization Infrastructure," although the gap between it and its closest rivals is narrowing. Since becoming leader in the virtualization market, VMware has ploughed on, trying hard to move into cloud and end-user computing. It continues to work with public cloud providers and has created its own public cloud service (vCloud Hybrid Service) to work with its on-premises and private cloud services.6 This poses a threat to Microsoft, although Microsoft has maintained its own public cloud services — including Windows Azure and Business Productivity Online Suite — for quite some time. Microsoft's Cloud OS — a cross-platform that allows end users to build an on-premises cloud while enabling a third-party public cloud and Microsoft's own public cloud — is its most recent vision.
End users now have more choice of private or public cloud implementations, but the tools to manage both private and public or hybrid environments will become a critical requirement in the near future.
The availability of open-source cloud management communities has created a new type of competitor in the increasingly crowded market for CMPs. Examples include OpenStack (leveraged by the likes of RackSpace, IBM, HP and Red Hat) and CloudStack (commercialized by Citrix), each with many distributions and growing communities. Red Hat, at its summit in June, announced its vision for an open hybrid cloud, whereby it can provide:
- Management over on-premises private clouds using open-source tools such as KVM and OpenStack
- Complementary cloud management capabilities via CloudForms (based on its ManageIQ acquisition) and OpenShift (for PaaS strategies)
Apart from Red Hat, other vendors will try to commercialize their open-source software (OSS) distributions. Even vendors that already offer commercial CMP solutions have announced support for and integration with OSS cloud stacks (such as HP and IBM for OpenStack). Red Hat's CloudForms offering has similar capabilities as System Center — if Red Hat opens up the source code, it could be a highly compelling alternative to System Center in the midmarket. This commercialization of open-source cloud solutions is likely to pose a threat to Microsoft's proprietary cloud solution and platform.
Many IT organizations have already used public cloud services, or are considering them. This is largely because more public cloud services have been provided to enterprises across industries and geographies in recent years, and more enterprise applications are being deployed in the public cloud. Reflecting this trend, Gartner predicts that the worldwide market for public cloud services will increase from $111.2 billion in 2012 to $244.2 billion in 2017, although most of this will be advertising revenue.7
This could have a harmful impact on Microsoft's on-premises application and private cloud solution business. IT organizations that have benefited from public cloud services tend to consume more enterprise application services from public clouds and buy fewer on-premises solutions. SMBs in particular generally want to use integrated and managed public cloud services rather than build their own private cloud.
Microsoft's own IaaS offering, Windows Azure Infrastructure Services, could cannibalize the company's private cloud and on-premises business. Although some enterprise workloads are not suitable for public clouds, public and private clouds will serve different needs with different tools. Of course, the synergies of a private cloud offering mean that Windows Azure could help Microsoft's private cloud business. But competition for market share among public cloud services providers (such as Amazon Web Services and Rackspace) is fierce. In general, this means that service fees for using public cloud services are decreasing granularly, hitting Microsoft's profitability. In addition, to save costs, public cloud services providers are more likely to use open-source solutions supplemented with custom code running on commodity hardware.
Most of Microsoft's enterprise infrastructure competitors (and, often, its partners) — even the laggards — now have a vision and strategy for the cloud, despite previously viewing it as a threat. Enterprise infrastructure vendors can provide private cloud computing in ways that range from mature to leading edge (see Table 2).
Source: Gartner (August 2013)
For Microsoft, which focuses on software and services, this creates a range of competitive pressures, in areas ranging from hardware to management software and cloud IaaS (used for externally hosted private clouds). Moreover, many of these other providers are subject to the complexity of heterogeneous enterprise IT environments — in that they have often been strategic partners for Microsoft — and the uncertainty that arises from so-called "co-opetition." Interestingly, in the era of the cloud, traditional competitors are also forming new alliances — one example is the partnership between Oracle and Microsoft, announced in June 2013.8
In the longer term, Microsoft needs to demonstrate its leadership by differentiating and innovating its portfolio of private cloud products. Although it has been strengthening its private cloud offering, it needs to work on some areas:
- Heterogeneity. We are seeing a trend toward the management of heterogeneous hypervisors and platforms, so Microsoft needs to demonstrate its leadership in this area. This is relatively unfamiliar territory for the company, but as a largely secondary player in the server virtualization and CMP markets, it needs to step outside its comfort zone.
- Cloud OS. As announced more than a year ago, Cloud OS can help the company to enable a future cloud environment with different deployments (such as on-premises, Azure and third-party clouds). Cloud OS can also act as part of the general consolidation effort going on in Microsoft. The company needs to carefully craft its strategy for enabling service providers with Windows Azure Pack, or risk providing public cloud services that could compete with Azure and cannibalize its on-premises business.
- Product innovation and leadership. At the moment, we believe that Microsoft is seen as a good-enough solution provider. To move beyond this, it first needs to make its products more interoperable and feature-rich. Microsoft has gaps in its products, such as management, automation and chargeback, and it needs to work hard to fill these faster than its competitors can exploit them if it wants to grow its business. The announced launch of Windows 2012 R2 and System Center 2012 R2 at the end of 2013, along with more rapid product delivery, can enhance its leadership in the private cloud space further.
Recommendations for Microsoft's partners:
- Leverage Microsoft's pricing advantage to compete with non-Microsoft or competitive solutions in the market.
- When recommending Microsoft's private cloud solutions, specifically target midsize enterprises, departmental use cases and first-time buyers of virtualization.
- Use the Microsoft-based relationship you have already established with clients (such as for Enterprise Agreement and all-Microsoft stores) to upsell or cross-sell Microsoft's private cloud offering.
Recommendations for Microsoft's competitors:
- Continue to innovate, particularly in the areas of heterogeneous management and automation.
- Differentiate yourself from Microsoft's private cloud solution, and target specific customer segments with which Microsoft has fewer competitive advantages.
- Work quickly and extensively with cloud services providers and data center operators with which Microsoft has yet to establish a strong foothold with its platforms. Target service providers that are competing with Azure public cloud services.
Microsoft, a multibillion-dollar IT vendor, focuses mainly on selling software, but it has diversified into computing hardware and public cloud services. According to Gartner's market share analysis, Microsoft is a dominant player in the OS market and a distant second in the x86 server virtualization market. Its management tools are historically included in its Servers and Tools business group, which, after a recent reorganization, will now be co-owned by its Operating Systems Engineering Group and its Cloud and Enterprise Engineering Group. Microsoft's server OS and IT operations management business lines generated about $9 billion in software licensing revenue in 2012 (see "Market Share: All Software Markets, Worldwide, 2012").
The provider analyzed in this SWOT was selected as it is one of the leaders in the x86 server virtualization market and a potential challenger in the market for CMPs. This makes it a viable candidate for end-user organizations choosing a private cloud solution. Microsoft has been in the infrastructure software layer market for a very long time, and it has a significant footprint in the market for enterprise IT systems and architecture. As cloud computing has changed how enterprises set up and architect their infrastructure, Microsoft's organization and "follower culture" have prevented it from responding to market changes in a timely way. But the company is catching up with its competitors and its users' demands.
This research aims to provide a foundation on which Microsoft, its partners and its competitors can act. By exploiting the relevant opportunities, Microsoft could rebuild its position in the enterprise infrastructure layer; otherwise, it could face serious challenges.
Gartner's vendor SWOT analysis is designed for providers and individuals to use in their strategic planning, marketing and competitive analysis, to supplement their planning processes. Its primary value is as an independent analysis of the provider's competitive situation. The SWOT analysis provides a unique independent view of the strengths, weaknesses, opportunities and threats for a specific part of a provider's business in a specific market and geography.
1 See Microsoft Case Studies for examples.
2 See "Enrollment for Core Infrastructure: Frequently Asked Questions," Microsoft, 2013.
3 For more information, see "License Mobility through Software Assurance on Windows Azure," Microsoft, 2013.
4 See G. Eun, "Oracle and Microsoft Expand Choice and Flexibility in Deploying Oracle Software in the Cloud," Oracle Blogs, 24 June 2013; and S. Nadella, "Partners in the Enterprise Cloud," The Official Microsoft Blog, 24 June 2013.
6 See L. Leong's "VMware Joins the Cloud Wars With vCloud Hybrid Service," The Gartner Blog Network, 21 May 2013.
8 See S. Nadella, "Partners in the Enterprise Cloud," The Official Microsoft Blog, 24 June 2013.