TNW was fortunate to recently interview Satya Nadella, head of Microsoft’s Server and Tools division. During the course of the discussion, Microsoft’s cloud strategy, the origins of Azure, the coming migration of SkyDrive, and how the company interacts with startups via its partnerships and offerings were discussed.

The following post is structured in narrative parts that build on the preceding section. Each can be read individually, however, or in any order. All quotes, unless otherwise noted are Satya’s, and are sourced from a prepared transcript, with edits in place for clarity and length.

As background, Microsoft’s Server and Tools division commands nearly $19 billion in aggregate yearly revenue. Inside of the Server and Tools group, there are 6 individual businesses with at least $1 billion in revenue. As business units go, the S&T group is big, and growing.

Now, let’s get into the cloud.

Azure’s origins

Azure, Microsoft’s Platform as a Service (PaaS) and Infrastructure as a Service (IaaS) service, is a well-known product that has been in the market for years. However, less well-known outside of Microsoft are the origins of the project.

Interestingly, Azure did not begin life as a new product, straight from a drawing board. Instead, it is the natural outgrowth of a second Microsoft product that you have likely heard of: “Azure started off by basically taking some of the core, underlying infrastructure of Bing.”

Bing is not minor undertaking, to be clear. It controls double digit market share on its own, and when combined with the share of search that it powers via a partnership with Yahoo, is the key second voice in search. Certainly, Google continues to rule that specific market niche the world around, but Bing cannot be dismissed.

As you might expect, Bing and Azure have remained close, given their origins. Azure may have started from Bing, but things are “now the exact opposite: all of the Bing apps on Windows 8, for example, Bing news, and Bing stocks, run on Azure.”

What was once the progeny is now the foundation.

Azure is growing rapidly, as you likely expected, given the rising profile of the cloud in nearly every technology space. Microsoft has doubled the raw compute capability of Azure in the last year. And as Satya explained, much of that growth has been due to external demand.

Devices and services

To properly place Azure and the cloud into the larger context of Microsoft, it’s key to understand what Microsoft’s corporate strategy is, and where the company is headed.

Much has been made of the firm’s move from a purely software company into a firm that provides devices and services. Devices, in the context of Azure, are less important than the idea of selling services; the devices in this case are simply what the services run on. For this article, we set them aside.

What does it mean to provide a service? Microsoft has generated tens of billions in profit selling software in a box, and software via download. The idea of generating revenues from one-off software sales has been enormously successful for the company. However, the market is changing.

The interconnectedness of computers, and all computing-enabled devices – smartphones and tablets, for example – have made one-off software unwieldy, as customers want their tools to be on all of the platforms, and work in harmony. It takes time, however, to move from a purely transactional software company to one that vends services on a subscription basis.

Given the complexity of that transition, one would expect to find transitional products in place, to help move users and enterprise customers from one paradigm to the next. Office 365 is an example of such a product, fusing a desktop experience with a set of cloud-based tools that represent Microsoft’s concept of providing services.

Azure is the platform that Microsoft’s growing set of services will run on. Satya phrased it in the following way: “Microsoft’s cloud strategy is in support of these really defining things that we’re doing.”

Azure’s rising profile

Such a strategy puts Azure directly in the middle of the rebirth of Microsoft. As it is the product that will undergird much of the company’s new products – indeed, does already – it will play a key role in nearly every step of the company’s new direction.

It’s important to keep in mind, however, that although Microsoft is responding to market trends, and pivoting its products to better align with the future, it faces significant headwinds. Smaller companies are blazing trails more quickly than it can, as they don’t have millions of legacy customers to at once serve, placate, and transition. Therefore, as we discuss the company’s plans, it is important to understand that even the best intentions can lead to mediocre results. So far Microsoft’s plan appears to be working, but it is early innings yet.

Microsoft is completely cognizant of the size of bet it has made on Azure. After noting that it is in support of a great number of its products, Satya went on to state that “a lot of what we do in the cloud is to make Windows 8 great.”

Anyone who has even passing hands-on knowledge of Windows 8 knows that this is the case; the apps from Microsoft that ship with Windows 8 are built on Azure, as we noted above. If you didn’t have Azure, you couldn’t have Windows 8 in its current form. Satya echoed this: “The way I think about Azure is as the underpinning of everything that we are doing in the cloud.  You could even say that a lot of the motivation for Azure is that we need it for our own cloud infrastructure.” As Azure was born from Bing, that is hardly surprising.

Azure runs more than the Bing apps for Windows 8, however, giving Microsoft a complex set of first-party demands. Referencing the set of ‘workloads’ that Microsoft products require from cloud tools, Satya explained that each has data and processing needs that are unique. Given that reality, the company’s “strategy in a nutshell for Azure is to build for our own first party usage and make it available to every enterprise, and every enterprise ISV, or any other organization.”

Moving outside of Redmond, what is the market positioning of Azure outside of Microsoft?

Screen Shot 2012 12 13 at 11.54.56 AM 730x350 Microsoft’s cloud vision: Why Azure is the linchpin of the firm’s new ‘devices and services’ strategy

Azure abroad

It’s best to begin this segment with a question. Satya: “how do we create the ability for third parties to effectively monetize their wares with us?” That’s the larger goal of Azure outside of its first-party environment.

While Microsoft’s own remains a large segment of Azure’s usage, it will be “a smaller percentage of the total capacity of Microsoft’s cloud, because the third parties will scale.” The company fully expects that other users of its IaaS and PaaS services will grow quickly, and if TNW is reading properly between the lines, challenge Microsoft in terms of aggregate usage.

Given that Microsoft will run its entire services empire from Azure, that’s not a small point.

How will Microsoft drive adoption of its Azure product, in the face of stiff competition from very competent market leaders, such as Amazon’s AWS, and scrappier smaller providers, such as the Rackspace cloud? Microsoft doesn’t often command significant mindshare among the current generation of entrepreneurs, frankly. Walking into the office of a early to mid-stage technology firm anywhere in the Valley or San Francisco is akin to wandering inside a very demure Apple showroom.

The company has made great strides in the last two years, but Microsoft’s stodgy past, and lingering reputation for former sins – think or the dark days of Internet Explorer – remain. The fog is dissipating, however.

Satya, however, sees the growth of Azure as something that is hardly a new challenge for Microsoft: “Fundamentally, we’ve been at this platform business forever. This is part of our core DNA, that whenever we think about how do we build out anything that we do, we think about the developer component as a very, very significant, first-class piece.” Therefore, to quote Microsoft CEO Steve Ballmer, the solution is, as always, ‘developers, developers, developers.’

However, there is more to growing Azure among third-party clients than simple developer support. As TNW has variously reported, Microsoft has been promoting the service through BizSpark, the company’s package of goodies for young firms, a free tier, and through less traditional means, such as themed incubators for startups. Satya describes such things as “incentives,” provided so that a younger company can “have $60,000 of credit to be able to use it [to help build their company].”

As part of TNW’s discussion with Satya was Ori Sasson of Emotive, a newer technology firm that switched from Amazon’s cloud services to Azure, who pointed out that the ability to scale, without compromise, is a key selling point of Azure. Azure’s sheer size is a “very positive aspect” of the service, he told TNW. “The fact that you have products like Bing, Office 365 running Azure gave us the feel that we would never have any worries about scalability.” His firm, he said, targets large, multinational firms, meaning that a requirement was room to maneuver. Naturally, AWS doesn’t lack for capacity, but Microsoft appears able to match it in terms of green-field space.

TNW asked about Azure’s free tier, and how it compares to that of Amazon; offering such free access can be a strong way to let people test a service without needing to reach for their wallet. And as the key cloud services providers each provide a free tier of service, it appears to work.

On the subject, Satya spoke at some length: “The free offers are very competitive - this is a very dynamic industry. I always will be looking at what does it take to get people to get started. One of the things that I obsess a lot about is the total productivity. The concept of Azure, which was in place from day one, was a cloud service.”

Given Azure’s early focus on being a PaaS provider, and not an IaaS provider, Satya went on to explain that developers “don’t want to be in this business of VM management, because at the end of the day that will drown you where you suddenly get distracted from your application to be.”

Satya’s view, in other words, is that Azure’s free tier is competitive, and given its focus on being a cloud platform and not simply a storage solution perhaps gives its no-cost options an edge. We’ll leave that for the developers to litigate with their business.

The enterprise goes cloud

Microsoft is building its corporate future on Azure, and is encouraging startups to do the same. But are enterprise customers adopting the platform?

Enterprise sales are not simply a piece of Microsoft’s revenue – without them its Windows platform would lose key support and perhaps cede ground to Apple’s consumer-focused OS X at a faster clip than it currently is. Thus, to vend Azure to enterprise customers is not only a marginally profitable – one expects – proposition but one that further cements the company’s relationship with key clients.

Early signs appear positive. According to Satya, if you were to scan Azure adoption you would see extensive use of the service by “game developers, newspapers,” and “media companies.” However, in the last year, around 2,000 clients have added Azure to their Enterprise Agreements, providing an “all-you-can-eat” Azure experience. And they aren’t simply dropping raw data onto the cloud, according to Satya, but are instead building wholly new applications on top of the service.

Parsing that slightly, over 2,000 enterprise level firms have added Azure to their standing agreement. For a year’s progress, that’s not bad. Momentum here can’t be judged too effectively – we’ll have to check back in a year to see if the figure has doubled, or grown at a larger rate.

What we would give to know the average cost of adding Azure to an Enterprise Agreement thus far.

Screen Shot 2012 12 13 at 11.57.31 AM 730x300 Microsoft’s cloud vision: Why Azure is the linchpin of the firm’s new ‘devices and services’ strategy

The future of the cloud at Microsoft

Microsoft has work ahead of it; its cloud push is hardly complete. An example of this is the fact that SkyDrive doesn’t yet run on Azure. It, however, will: “it’s moving towards Azure,” Satya allowed.

There is an element of convergence to what Microsoft is up to, quite obviously. TNW will spare you endless words on the key convergence of Microsoft platforms, but what can be said is that its cloud push is part of that process of uniting disparate products. Satya has a fun way of putting that into words: “In fact, the simple way I describe it is anything that’s common across all of Microsoft properties will be Azure.” Read it again. Azure, Satya said, is the “core infrastructure.”

Not all of Microsoft’s needed work on Azure is inside-facing, however, as its efforts on Hadoop have shown. “What I preach inside my team is, look, every billion dollar starts first with being a million dollars.”

Wrap up

Taking all of that information in aggregate, it’s simpler to understand how Microsoft is rebuilding itself, and how large a task that truly is. To be frank, not since the Internet became a priority for the company has there been so large a change at the firm, it could be argued. Even Windows 8’s changes to the Windows brand are component to the shift.

Satya puts it in the following way: “what we’re doing across the company between devices and the cloud and services is the front and center priority for us, and we are well on our way with what that, given what we have done with Windows 8 and what we are doing with Windows Phone and Windows Azure.  I think that represents the core of the reinvention and the re-imagination of the Windows franchise.”

The new Microsoft will run on Azure. And if Microsoft has its way, so will your business.

Image Credit: Robert ScobleSean Gallup/Getty Images Rainier Ehrhardt/Getty Images