Microsoft (NASDAQ:MSFT) is seen as an operating system company, but that is no longer true.
It's a business services outfit.
Microsoft has been using the profits from Windows and Office to move "up the stack" in computing for a decade now. Its main competition these days comes from companies like IBM (NYSE:IBM), Oracle (NASDAQ:ORCL), SAP (NYSE:SAP) and Hewlett-Packard (NYSE:HPQ). The days when it was defined by "the channel" are over - now it is the channel, trying to maintain its status as "one throat to choke" for scaled enterprises, and using their dependence on Windows in the same way that Oracle uses its dominance in databases, as a leverage into cloud.
Azure, then, is far more important to Microsoft's future than, say, Surface devices, or even the Xbox game system. And Azure has had a tough time getting out of its own way. Microsoft saw it as embracing-and-extending Windows, a platform with tools and software. Earlier this year it decided it had to match prices with Amazon.com (NASDAQ:AMZN), which dominates cloud infrastructure, the barest bones of cloud computing, with its EC2.
Now, finally, Microsoft has something of a vision in the cloud. It's pushing to become the dominant provider of "hybrid" cloud, which combines customer-facing public cloud systems and corporate-facing private cloud systems.
Thus, its recent tie-up with Equinix (NASDAQ:EQIX), which has been providing corporate data back-up since the 1990s, is more important than it appears. The move will speed-up access to Azure, through Equinix' 100 data centers, and enable a fluid interconnect from Windows tools to global, backed-up cloud systems.
This is the kind of service global customers are looking for, and Equinix thus becomes part of what Microsoft hopes will be a large network of cloud re-sellers. It will let companies that don't trust U.S. hosting to put clouds wherever they're comfortable, and through direct interconnects get full development and cloud services for a global footprint.
This puts Microsoft on a collision course with IBM, which has been adding more flexibility to its own cloud offering since its purchase of Softlayer last year. A network of cloud-based data centers, with a full collection of tools, support and back-up, are a prerequisite for large companies trying to move out of the old client-server world into the new cloud world. Data systems can now be replaced by private clouds, and workloads moved slowly off them, with those clouds connected to high-speed global networks and redundant back-up systems.
The question for investors is whether they should put their money on the infrastructure companies like Equinix or those which are customer-facing, like Microsoft. Until the middle of 2013, the answer would obviously have been Equinix, which had more than tripled in value from mid-2008 to mid-2013. But since April the situation has flip-flopped - Equinix is down 24% while Microsoft is up 10%.
This is an important inflection point for cloud investors. Until now enabling technologies like public cloud and cloud software were the place to play. But I think this deal shows that integration and branding are becoming more important, as the data center moves inexorably toward cloud technology.
If Azure and its other data center activities can be separated from the consumer names by new management, investors are going to be tickled green by the new Microsoft. Even without new, imaginative management at the top, however, Microsoft should remain a solid yield stock going forward, fully capable of increasing its present yield of 3.34%.
So you can invest in Microsoft now and know your money is safe, or speculate that it seizes its opportunities next year for your benefit. That's a win-win.
Disclosure: I am long IBM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.