How can customers expect licensing to change in the cloud model?
The biggest change as we move to the cloud model is it's a subscription-based model. It's an ongoing payment structure, because, obviously, you're running the service for the customer. If it is a well-defined service, like messaging or collaboration or CRM, it will typically be a per-user fee of some form that's paid, which is fairly consistent with the way they buy today, although they typically don't buy it by subscription. They buy it as a one-time purchase, but they, again, pay a per-user fee.
For business applications, the cloud model is based on instances or capacity-based, so it's based on the usage of the application. The model changes somewhat. Obviously, one of the implications is that, particularly if you're moving to a public cloud environment, there's a transition from having upfront cap-ex costs associated with purchasing hardware. That is not a software licensing issue, but it's very significant [change] to the customer, to an op-ex and ongoing charge.
But probably the most dramatic change that affects the customer in terms of the costs associated with this has nothing to do with licensing. It really has to do with their overall cost of operations. The promise of the cloud is that by running these things at very high scale, by using software to standardize and deliver a consistent set of services to customers, we can reduce the cost of running that operation very substantially.
We know that the majority of cost in IT is the people cost associated with operations. That's where the cloud really brings the advantages. The main advantage in terms of getting better business value at a lower cost is because the cloud standardizes the way operations is done and really dramatically reduces that.
If you look at most of our customers, they will have a ratio of somewhere between 50 to 100 servers per administrator. A world-class IT shop might get that up to 300, 400 servers per administrator. When we run these cloud services, we run them at 2,000 to 4,000 servers per administrator internally. By running it ourselves, we are also able to really engineer the software to continue to drive out that cost of operations in a way that I don't think the industry's ever seen before.
So, two questions on the shift to that kind of pricing. One, do you think customers are prepared for that? Do they have a good handle on a budget that goes from projects and cyclical upgrades to a subscription flow like that and are they understanding the long-term implications of that shift?
I think they love it. I think they're not just prepared, they're demanding it. This came home to me when I was at a CIO event -- it was large companies, top 100 U.S. companies. It was one of those vendor events where you're kind of getting beat up by about 20 guys. It's like dental work without any Novocain, basically, for an hour. One of the CIOs said to me, 'Bob, you don't get it. We never want another software update from Microsoft again.
We want the features. But you put all the burden on us. You put all the operations costs on us. You make us do all the work. I want you to handle that. I don't want to take care of it.' That's really the key to software as a service and the cloud all around: how we can provide the services to our customers and then keep them up-to-date. We can keep the value associated with the new technology flowing into the IT organization, into the company, and, thus, generate the business value. But they don't have to pay all the cost and have all the training and everything.
Do you think there's the potential for any surprise or risk for them? Could cloud end up costing them more over time?
Well, there's always [that] potential. I'm sure there will be cases. But I think, in general, it will really be transformative to enabling businesses to focus more on what they can add value to. That's part of the promise of the cloud, that the customer can focus on their business and adding value through IT and things that make a difference to the business versus the things that they have to do now that are not differentiating. Customers are able to achieve a larger focus on the things that enable them to differentiate.
There will be problems. There will be failures. There have always been those things. Throughout all of the history of IT, whatever promising new technology comes in brings with it some set of challenges, but it also advances things. Because of the focus on the business and business results [with cloud], the net benefit will be substantial.
Going back to the licensing, how does Microsoft navigate that change?
The model has been that you gather together a bunch of new features and new capabilities into a new release, which has big revenue associated with it. Now people are going to expect these features to just become part of the product to which they subscribe. Well, it's actually great for us, because our biggest competition with our new product releases is always our old product releases. We still have a lot of XP. XP is pretty much still ruling the world and we're seeing people now move to Windows 7. There's Office 2003 and Office 2007, and we've shipped Office 2010. That's always been our biggest challenge, the complexity customers have associated with moving forward is an impediment to our being able to license them new software.
The cloud will eliminate that because it's our job to move them forward. We'll deliver a service to a customer that is evergreen. It's always up-to-date with the latest set of features. We need to provide customers with some level of control. I mean we don't want to update a retail customer from just before Thanksgiving until after Christmas. But we will commit to keeping and maintaining the software for the customers, one of the main differentiators.
That's a huge advantage to us, because our sales force today spends a lot of time explaining the advantages of the new release and why a customer should go through the upgrade themselves.
When we talk to readers about cloud, management is always an issue; security's always an issue. Can you talk about what Microsoft is doing to address those big worries about cloud computing? We've invested very heavily in both of those areas for quite a number of years. Let me take them separately because I think the issues are somewhat different.
In the case of management, the advantages and benefits that accrue from the cloud largely have to do with changes in the operational environment and the way things are managed.
So, there are some natural advantages from a management perspective. One of the things we are doing is enabling customers to use their existing management tools, like System Center, to help bridge the gap from where they are today into the cloud environment. And so they'll have a consistent set of management facilities and tools and one pane of glass, so to speak, that they can look across both of these environments. In contrast, security is different because you're moving into, in many cases -- particularly a public cloud -- a shared environment. There's a need for an incremental set of security capabilities to be added.
Those are things that we are rapidly advancing. This environment still is nascent. There are still definitely areas where the cloud is not ready to take on all of the applications and services that customers want. I don't recommend [that] a banking customer move their core banking system to the cloud right now. I would not tell any bank to do that at this point, because the underlying facilities and services in the public cloud to handle the regulatory concerns, the security concerns, are simply not there. Five years from now, 10 years from now, I think they probably will be.
Most of the areas where you look at a focused or a finished application, like messaging, for example, we are able to work through and provide the security that's necessary, the regulatory requirements that are necessary to handle just about every industry right now. So, in most countries around the world -- every country is somewhat different -- we are able to handle the needs of financial services organizations, pharmaceuticals, I mean the more regulated industries. We have examples of customers in all of those industries that are using our cloud services.
The cloud is kind of a misnomer. It's more like multiple clouds. What is Microsoft doing to drive interoperability and standardization across different cloud platforms to make it easier for customers to bridge them? There's obviously a number of emerging standards that are going to be important here. They're still emerging, so knowing which ones are important and which ones are not [is difficult]. We're involved in that. I think, in the end, people will say, 'The most important characteristic is that I need the cloud services that I have to fully interoperate. And then I also need to have choice of vendor." Those are probably the two main things. In both areas, we're investing significantly.
All of the services that we're delivering in our clouds are based on Internet standards, either Web services or REST-based protocols, pretty much exclusively. We've used those standardized protocols as we've been building out our clouds. The only things that I would say probably don't fit in that nature are areas like messaging and collaboration, where there are no standard protocols that have really emerged. If there is a standard, it turns out to be something like ActiveSync, which Microsoft has now fully licensed. That's what everybody uses now to synchronize their e-mail.
That's how an iPhone synchronizes, a Google, an Android. Also, there are protocols that we built and have now made available to people. We've built these proprietary systems, but have now fully published our protocols and everyone else is adopting them in the industry.
In the case of Windows Azure, it's all Web services and REST-based stuff and everything is done that way, so it's interoperable.
The other thing that's important is that the customers say, 'I don't want only one cloud provider. I don't want to be locked into Microsoft or Google, anyone else.' We're in a very strong position because we're running the cloud ourselves with Windows Azure. And we're working to offer this Azure appliance that allows service providers, telcos and hosters, to also run cloud. So customers will be able to choose, from a number of different providers to run their sets of services. That's good, because there are a million reasons why customers might want to choose to use a given service provider.