MSFT Microsoft Corporation

By Aaron Tilley 

Microsoft Corp. is introducing new tools to accelerate its campaign to outflank cloud-computing rival Amazon.com Inc. by targeting big businesses that have balked at shifting their data to the cloud.

The tools Microsoft is unveiling Monday are aimed at what is perhaps the hottest part of the multibillion-dollar cloud market, the so-called "hybrid cloud." Those cloud systems let companies shift some computing to cloud services while keeping control of data they need to hold closely.

Cloud computing, whereby customers rent some of their large computing horsepower rather than investing in their own, has become a profit driver for Microsoft and Amazon. Microsoft's commercial cloud revenue has roughly doubled in the last two years to $11.6 billion in the last quarter. The success of Azure, Microsoft's cloud offering, has helped turn the Redmond, Wash., software giant into a $1.1 trillion company.

The cloud market overall reached $175.8 billion in sales in 2018, according to Gartner Research Inc.

Much of the early cloud growth was driven by businesses that hadn't spent heavily on in-house IT departments. Startups easily moved to the cloud, where Amazon's cloud unit, known as AWS, had success.

But many of the companies with the biggest IT budgets, such as those in highly regulated industries like finance, have remained partially on the sidelines, in part because of regulatory hurdles that make it difficult for them to store some data on servers belonging to other companies.

Other companies have been slow to invest in the cloud because of specific business challenges. Cargo ships and remote oil and gas extraction sites, for example, can be difficult to connect to the cloud.

To win business from such customers, cloud services providers such as Microsoft are expanding into what they call the "hybrid cloud," a mix of cloud IT systems and data centers owned by customers, where some of the most sensitive information is stored and processed.

Amazon was a pioneer in the cloud business. Microsoft has been playing catch-up, and put more emphasis on the hybrid cloud. "It's really been a differentiator for us," said Scott Guthrie, Microsoft's executive vice president running the cloud and artificial intelligence group.

Microsoft said on Monday that it would expand its Azure cloud offering aimed specifically at the kind of customers looking to implement hybrid cloud systems. Microsoft has been offering its Windows operating system to run on customers' servers for decades. But two years ago it wanted to expand its businesses and began allowing customers to run part of its Azure cloud on their in-house equipment to allow those servers to work seamlessly with the Azure data centers Microsoft runs.

Now Microsoft is adding new versions of those servers, which it calls Azure Stack. Among them is a "ruggedized" version, more robustly constructed to withstand tougher environments to appeal to military users. Microsoft just won a contract valued up to $10 billion to provide cloud infrastructure to the Pentagon, which is expected to have hybrid cloud features because some military information is too sensitive to put into the cloud.

The company is also introducing a system called Azure Arc to let more of its cloud-based database applications run inside customers' data centers.

Microsoft isn't alone in its hybrid cloud bet. International Business Machines Corp. spent around $34 billion to buy open-systems software company Red Hat Inc. to bolster its hybrid cloud credentials. "I view this as a defining moment in IBM's cloud journey," Chief Executive Ginni Rometty said in July when the deal closed.

IBM, which trails Amazon, Microsoft and others in the total cloud market, has said it wants to dominate the hybrid cloud era. IBM has said only 20% of businesses have made their commitment to cloud services. Arvind Krishna, IBM's senior vice president for the cloud, has said the hybrid cloud businesses represents a $1.2 trillion business opportunity between hardware and software products.

Oracle Corp., another company doing extensive business with corporate IT departments, has said hybrid cloud is a priority and in October said it was increasing its cloud-computing staff.

Julia White, corporate vice president of Azure, said Microsoft designed its cloud from the outset with the hybrid model in mind. "It's been our belief from the beginning that systems would be distributed," she said in an interview.

Amazon and Alphabet Inc.'s Google, another competitor, have their own hybrid cloud aspirations, including letting their cloud technology run on data centers that customers already have. Late last year, Amazon announced AWS Outposts, a product similar to Microsoft's Azure Stack servers.

Amazon's move is pushing Microsoft into further investment, said Erik Vogel, a global vice president of customer experience for Hewlett Packard Enterprise Co.'s GreenLake service, which works with clients to manage their hybrid cloud, and partners with big public cloud vendors such as Microsoft. "We're seeing a renewed investment and push for the Azure Stack solution," he said.

Write to Aaron Tilley at Aaron.Tilley@wsj.com

(END) Dow Jones Newswires

November 04, 2019 09:14 ET (14:14 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.