- Estimates suggest that Azure is already bigger than Windows and commercial subscriptions to Office 365 productivity applications.
- The Azure business has been around since 2010, while Office goes back to 1989.
Microsoft's Azure cloud for hosting web sites and applications will replace the Office productivity software as the company's largest source of revenue at some point in 2022, Piper Sandler analyst Brent Bracelin predicts.
It would be a striking milestone, underscoring Microsoft's successful transition from on-premises software to cloud-based services since Satya Nadella took over from Steve Ballmer in 2014.
Piper Sandler, who has the equivalent of a buy rating on Microsoft stock, said Azure revenue came out to $7.20 billion in the company's fiscal second quarter, which would mean that it contributed 17% of Microsoft's total revenue, compared with 4% three years ago. Microsoft doesn't disclose Azure revenue in dollars, but the Piper Sandler estimate is in line with broader sentiment. Analysts at William Blair, who also have the equivalent of a buy rating for Microsoft, estimated that Azure revenue was $7.40 billion.
That means Azure is already significantly larger than the Windows franchise, which dates to 1985 and helped make Microsoft the most valuable and powerful tech company in the world in the 1990s. Windows generated $5.72 billion in revenue in the quarter, according to Microsoft's earnings statement.
Azure has also exceeded Office 365 revenue from commercial customers in the quarter ended in December, Piper Sandler estimated.
Now it's a matter of determining when Azure could eclipse all of Office, including consumer subscriptions to Office 365 and traditional Office licenses. Piper Sandler says that's likely to happen next year.
"We have quarterly Azure revenue of $11.8B by June 2022 (eclipsing Office all-in revenue of $10.9B for the first time)," Bracelin told CNBC in an email on Wednesday.
Microsoft's Office franchise has been around since 1989, and its oldest component, the word processing software Word, has existed since 1983. It holds a controlling market share, and under Nadella, Microsoft has moved many of its business customers from buying Office software licenses to paying continually for Office 365 subscriptions.
Azure, by contrast, has only been available since 2010 — it was originally called "Windows Azure" — and technology industry research company Gartner estimated that in 2019 it was about 40% the size of market leader Amazon Web Services, which Amazon introduced in 2006.
Both Office 365 and Azure originated at Microsoft while Ballmer was CEO, but Nadella has made Azure an area of greater emphasis, forming cloud partnerships with companies that have historically been competitors, including Salesforce and Sony. Nadella also led Azure before he accepted the CEO title.
"He spearheaded major strategy and technical shifts across the company's products and services, most notably our move to the cloud and the development of one of the largest cloud infrastructures in the world supporting Bing, Xbox, Office 365 and other services," Microsoft said of Nadella in its 2014 proxy statement after he became CEO. "This experience is fundamental to the company's current strategic direction."
Nominations are open for the 2021 CNBC Disruptor 50, a list of private start-ups using breakthrough technology to become the next generation of great public companies. Submit by Friday, Feb. 12, at 3 pm EST.