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Microsoft Cloud Partner Revenues, Profits: Reality Check

gavriella schuster

Gavriella Schuster

Microsoft is making a strong case for its Cloud Solutions Provider (CSP) partner program at Worldwide Partner Conference 2016 (WPC16). Indeed, new Global Channel Chief Gavriella Schuster points to a range of data points that show CSP revenue and profit momentum. But what exactly does all the research really mean? Here a reality check.

During WPC16, Schuster mentioned an IDC study that revealed…

1. Cloud Partner Revenues, Gross Profits

Microsoft, pointing to IDC, says: Cloud partners with more than 50 percent of their revenue in the cloud are growing twice as fast, realizing 1.5 times more gross profit and experiencing 1.8 times more recurring revenue than partners with less than 50 percent of their revenue in the cloud.

ChannelE2E Reality Check: The IDC figures certainly are impressive. But since traditional IT software essentially is a flat or a slow-growth industry, it’s no surprise that cloud-oriented partners are growing far more quickly — and generating more recurring revenues — than traditional partners. It’s sort of like saying cloud solutions providers are growing faster and have more recurring revenues than PC resellers. Um, of course.

2. Cloud Services Revenues

Microsoft, pointing to IDC, says: Microsoft partners with more than 50 percent of their revenue in the cloud are attaching $5.87 of their own services for every $1.00 of Microsoft cloud solutions sold.

ChannelE2E Reality Check: That’s an impressive figure that should give partners plenty of reason to formulate cloud strategies. But consider this key question: Are those IT services one-time revenues or recurring revenues? It’s one thing to make $5.87 in migration revenues for every $1.00 of Microsoft cloud solutions sold. It’s quite another to make $5.87 in recurring monthly revenues for every $1.00 of Microsoft cloud solutions delivered each month. We suspect the $5.87 figure represents a one-time IT project/migration fee rather than recurring fees.

3. Total Cloud Market

Microsoft, pointing to IDC, says: IDC forecasts that the greater cloud market will exceed $500 billion by 2020.

ChannelE2E Reality Check: Here again, the figures can be a bit misleading. IDC’s figures surely involve a range of infrastructure hardware that partners will never see or touch — all the hardware, for instance, that Amazon, Microsoft, Google and Facebook are deploying in their data centers. No doubt, the cloud opportunity is massive. But $500 billion by 2020? We wonder what percentage of that figure will actually involve partners? The world may never know…

Bottom Line: Microsoft Cloud Shows Real Progress

Despite our nitpicks, it’s undeniable that Microsoft’s cloud services momentum with channel partners is real. During a recent podcast with ChannelE2E and CompTIA, Microsoft’s Schuster described the growing CSP momentum and some remaining hurdles.

Moreover, corporate adoption of Microsoft Azure may actually leapfrog Amazon Web Services, according to a recent cloud adoption CIO survey by Morgan Stanley.

Still, Microsoft and its partners will face plenty of challenges even as the cloud services market continues to expand. Chief among them: Microsoft’s own cloud profit margins, which have triggered some recent concern on Wall Street. Managing those margins is a tricky process, especially as Microsoft scales up — or down — its Azure and Office 365 data center expansion rates based near- and long-term customer demand.

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9 Comments

Comments

    David Powell:

    Great point on the “reality check” on number 2. We are seeing that as everyone chases recurring revenue, the big vendors want to keep the recurring revenue for themselves and throw the one time project fees (migration/integration/consulting) to the partner community. While there is money to be made doing those projects, the partner community wants the opportunity to create enterprise value for themselves and the way to do that is to grow and own your recurring revenue stream.

    The vendors that can figure out how to “split” the recurring with the channel will be the ones that really disrupt the model.

    As I have said many times, the vendors have a great understanding of how THEY make money, but have very little understanding about how the partner community makes money and creates enterprise value. (The answer, to a large degree, is that we make money the same way they do, so they need to “share” the recurring stream with the channel.)

    Thanks for the insights!

      Joe Panettieri:

      David,

      Thanks for sharing your views as frequently as you do. A handful of “pure” channel vendors really understand the recurring revenue partner model. I think much of the problem involves IT vendors trying to please Wall Street and chasing early movers like Salesforce, rather than building relationships…

      We’ll continue to put the spotlight on the profitable models (as we find them). And we’ll continue offering reality checks wherever possible.

      Thanks again for being one of the people who helped to inspire E2E’s launch.

      -jp

    Jay McBain:

    Joe, thanks for sharing the numbers. The $5.87 number was touted by Salesforce as well this year. In their case, 695 partners drive $20B+ in services per year, although it is 80% project based and not recurring. (Still extremely profitable though).

    – Jay

      Joe Panettieri:

      Hey Jay: Thanks for reinforcing the numbers. And I also forgot to mention: Although I spent ample time describing the push toward recurring revenues, I’m not “anti-project.” A lot of channel partners continue to make a great living on IT projects, and the bulk of MSPs/CSPs I know have project capacity.

      For those seeking some facts and figures on professional services profit margins, check out the Top 20 Professional Services Businesses, which lists their EBITDA margins.

      Best,
      -jp

    TODD HUSSEY:

    I still don’t believe that the vast majority of partners get the new world – the new world is XaaS where the partner will get a modest commission on the Xaas that is sold and they will “not” make a business from that modest commission – end of story. Yes, the vendor will do whatever it takes to make their earnings #’s to the point of if they need to sell direct to end customers – they will. Where the partner will make a business is from MIC (Migration, Integration and Customization) OTR services (very predominant today) and MRR services (starting to evolve). With that said the real $, margin, value in the business and relevance is in developing their own IP. Net-net: if the partner is not software savvy they are probably toast eventually. As they say “All companies will become software companies to some extent – including partners”.

      Joe Panettieri:

      Hey Todd: Thanks for sharing some thoughts and congrats again on your own recent M&A. I agree that all companies will become software companies in some form. VMWare Channel Chief Ross Brown explained some of that trend in a recent podcast conversation with us.

      Still, I don’t think that example extends to all partners developing their own IP. Overall, I suspect fewer than 5 percent of channel partners will ever develop their own IP. Just a hunch… but a strong one.
      -jp

        TODD HUSSEY:

        Joe,

        I completely agree that a small % of all partners will/can create their own IP – they will eventually die of irrelevance and low margin – when – who knows.

    Mark A:

    Point 2 above is so true. The Microsoft Partner marketing hype certainly likes to serve up attractive scenarios like that, but agreed the ongoing margins are ridiculously small. Any business model heavily relying on that revenue as a cornerstone of their revenue would be odd. Great model for Microsoft themselves of course.
    The incentives, rebates from Microsoft are nothing more than a very minor side show for us. Need to factor in the cost of the Microsoft partner programs, certifications etc as well.

      Joe Panettieri:

      Hey Mark: Thanks for adding another perspective to the conversation. Going forward ChannelE2E will be sure to mention that partners need to factor in the certification costs, etc.
      -jp

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