"Cloud has a lot of focus right now but will not drive revenue growth over the next two to three years … Windows Server and SQL Server … are the big dogs really driving it," he said, of Microsoft's outlook for 2010.
Cloud not material to revenue for next several years
Muglia was bullish on cloud computing transforming the IT industry over the long term, but said that it will not be financially material (meaning more than $1 billion in revenue) to Microsoft's business for several years.
He said cloud computing is changing the way companies build and buy hardware and write applications. More computers will be bought in mass to run discrete systems, he said. Microsoft used to buy full, pre-configured racks of servers, but it's now buying entire shipping containers of two thousands servers and petabytes of storage at a time. This is rolled into the data center, where the company adds power, cooling and Ethernet, and it's ready to go.
"This is going to have a major impact on the way servers are built and shipped over the long term," he said.
On the software side, Muglia expects to see a large number of applications built on Windows Azure over the next few years, although he didn't give any numbers. According to Goldman's latest report on cloud, 10% of small businesses using cloud development platforms are using Azure, versus Amazon, Force.com or Google.
"We are a complete platform, whereas Amazon is just a raw virtual machine," he said.
That may be so, but Amazon Web Services has 70% of the market overall, according to Goldman's numbers.
"There's no question there's a higher capital cost associated with running Azure, but we think there are ways we can drive revenues and margins up with value-added services on top of Azure," he said.
He gave an example of a business continuity service which is typically a very expensive operation to set up for most companies that would be a "check box item" in Azure. "Business continuity can be done very simply and we would charge for that," he said.
Hyper-V versus VMware
Muglia spent more of his talk discussing Microsoft's position in virtualization versus VMware and how he sees this changing over the next few years. Thanks to virtualization, the enterprise edition of Windows Server now represents north of 20% of Microsoft's server revenue, whereas before virtualization the enterprise edition was always in the single digit percentages of revenue, he said. The advent of virtualization has enabled the company to grow above and beyond the hardware industry, he said.
"We were a bit behind VMware with a competitive feature set, but we're there now and we have a much, much better price," he claimed.
In the small and medium business (SMB) market, he said Microsoft has a "substantial advantage" over VMware, as Microsoft's product slots into the same Windows environment small businesses are already used to. The recent partnership with HP and HP's channel is aimed at driving small shops to adopt Microsoft's virtualization products, Muglia said.
When customers perform side-by-side evaluations of VMware and Hyper-V, Muglia claimed Microsoft has a 90% win rate. He said many users have committed to multi-year contracts with VMware, but that as these expire, he expects more enterprises to choose Hyper-V. For users that deploy both platforms he said: "You don't generally think of Microsoft for heterogenous management but we really are in this market."
Furthermore, the market for virtualization technology is far from saturated, according to Sarah Friar, managing director and software analyst at Goldman Sachs. She said only about 20% of all servers shipped today are virtualized and even within enterprises there is still a large number of servers not virtualized.
"There's lots of room for Microsoft to take share and grow the market," she said.
VDI does not save money
Switching to the topic of desktop virtualization, Muglia said Microsoft will continue to work with Citrix and to expect announcements in the next few months that would distinguish the company's offerings significantly against VMware.
He drummed home the point that most IT shops "will not save money deploying VDI," despite VMware's message that they will. In reality, companies are still managing each user's desktop image, just on the server now, meaning that the management cost is the same as a traditional desktop.
He said in some cases the data center costs might actually go up because of the extra power and cooling associated with those servers. "Just don't assume you'll save money," he said.
Vertically integrated stacks and Oracle
Analysts asked Muglia whether the trend towards vertically integrated stacks, like the EMC, Cisco and VMware virtual computing environment, were a threat to Microsoft. Muglia brushed this off, calling it a "back to the future trend" that reminded him of the mini computer business of the 1970s. Companies purchased from one vendor back then, but those days are long over and customers want choice at different layers of the stack, according to Muglia.
"They want to choose from best of breed and that's not going away," he claimed."I shake my head at the some of the things Oracle is doing," he said, of the acquisition of Sun Mircosystems and the trend towards consolidation. SPARC is "unambiguously a dying architecture," he said. "But if they want to keep spending money on it that's fine, we will keep selling x86 servers to our customers."
Jo Maitland is the Executive Editor of SearchCloudComputing.com. Contact her at firstname.lastname@example.org.