1. H
9B11E026
MICROSOFT’S GO-TO-MARKET STRATEGY FOR AZURE
IN INDIA
Aditya Shah, Sujata Ramachandran and Vivek Vikram Singh
wrote this case under the supervision of Reema Gupta and
Professor
Deepa Mani solely to provide material for class discussion. The
authors do not intend to illustrate either effective or ineffective
handling of a managerial situation. The authors may have
disguised certain names and other identifying information to
protect
confidentiality.
Richard Ivey School of Business Foundation prohibits any form
of reproduction, storage or transmission without its written
permission. Reproduction of this material is not covered under
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Publishing, Richard Ivey School of Business Foundation, The
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3. Zinnov Management Consulting to
conduct focused research1 on IT opportunities in Indian SMBs
and on levels and trends in the utilization of
IT services in the Indian market (see Exhibits 1 and 2). The
report mentioned that the Indian government
had taken a number of initiatives for growth of the SMB
segment. It also mentioned, “India has 31.8
million SMBs across different verticals. The PC penetration in
these verticals or industries is varied. IT
spend in SMBs was $6.2 billion in 2007, which was 30 per cent
of the total IT spend in India” (see Exhibit
3). Having received the report from Zinnov (see Exhibit 4),
Arora was convinced that reaching out to the
SMBs involved a huge initial investment. The following
questions ran through his mind: Was India ready
for this new form of delivery for IT services? Would Indian
businesses be comfortable having their data
and applications running in machines that were not physically
on their premises? More importantly, did
India have the basic infrastructure, such as broadband
connectivity, to enable widespread cloud service
1 “IT opportunity in Indian SMB Sector,” Zinnov, May 20,
2008,
www.zinnov.com/pdfFiles/1214291166Study_IT%20Opportunit
y%20in%20Indian%20SMB%20sector_May08.pdf, accessed
January 21, 2011.
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adoption across Indian cities? Would the Indian market provide
the volumes required to ensure the success
of Azure? Arora was sure of one thing: the product should be
simultaneously launched in India and the rest
of the world.
CLOUD COMPUTING
Cloud computing referred to an emergent form of delivery of
technology resources in which information
storage and processing capacity would be offered on demand as
services. Computing power and resources
would be delivered, such as electricity and other utility
services: always available when the organization
needed them, and only paid for if and when consumed.
The promise of cloud computing was reflected in the growth
estimates for the market. Zinnov estimated
that the worldwide revenue for cloud services was likely to
reach $70 billion by 2015. Estimates for the
Indian market were not easily available; however, most IT
analysts estimated the addressable market to be
around $1 billion.2
Key Drivers
The key advantage that cloud computing offered companies was
9. the chance to convert large capital
investments in technology into smaller variable operating
expenses. Consequently, firms saved significant
costs through improved resource utilization and infrastructure
management. By allowing firms to scale
capacity up and down dynamically, always guaranteeing that
capacity would be available whenever
necessary, cloud computing brought in strategic advantages.
During peak periods, one could add
computing power and then scale it down during the lull periods.
For all this, one was expected to pay only
based on usage — a few cents an hour perhaps; furthermore,
this helped save costs by eliminating the need
to hire additional IT personnel to maintain those largely
redundant extra servers. The maintenance costs
were transferred to the ‘utility’ provider, and this provider was
paid based on a ‘per-use’ fee. The potential
for savings was significant. For instance, a study3 conducted by
McKinsey Consulting for the U.S.-based
Uptime Institute, an organization focused on improving the
efficiency of data centres, found that data
centres typically accounted for 25 per cent of corporate IT
budgets when facilities, servers, storage and the
labour to manage them were taken into account. Further, the
facility costs were growing at 20 per cent
annually. Yet, server utilization rarely exceeded six per cent
and facility utilization was often as low as 50
per cent. For information-intensive industries, these costs and
their growth threatened profitability and
even survival. Cloud computing offered an efficient alternative
for these firms to reduce waste in capital
employed and energy used and redeploy organizational
resources to more strategic ends.
Different Forms
10. Cloud computing was broadly classified as ‘Infrastructure-as-a-
service (IaaS),’ ‘Software-as-a-service
(SaaS)’ and ‘Platform-as-a-service (PaaS).’ In the case of IaaS,
the end-user could rent computing
infrastructure. In the SaaS model, the end-user avoided the
initial licensing cost of software and used the
software on a pay-per-use basis, also called ‘software on
demand.’ PaaS provided a combination of
2 B.M. Thanuja and Varun Dutt, “Silverlining,” Financial
Chronicle, May 18, 2009, www.mydigitalfc.com/it/silverlining-
368,
accessed January 21, 2011.
3 James M. Kaplan, William Forrest and Noah Kindler,
“Revolutionizing Data Center Energy Efficiency,” McKinsey &
Company, July 2008,
www.mckinsey.com/clientservice/bto/pointofview/pdf/Revolutio
nizing_Data_Center_Efficiency.pdf,
accessed January 21, 2011.
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15. applications could be built. Microsoft Azure was
an example of PaaS.
Risks
Though it was acknowledged as a significant IT innovation,
cloud computing had its own challenges. The
key risks included data privacy, compliance, legal issues, data
security and threats of vendor lock-in.
Privacy was a key concern regarding data being stored on the
cloud — the shared environment being
perceived as a threat to its integrity and security. Software
providers would no longer have complete
control over their users’ data stored in the cloud, and the
security of that data would depend on the security
capabilities of the cloud service-provider. Many end-users were
uncomfortable with the idea that their
confidential information would now reside outside their secure
office premises.
A related issue was the physical location of the data. Many
governments mandated that such data could not
be located outside the country of the end-user. This was not
always possible with cloud computing, since
data centres were typically located where costs were the lowest
and generally served countries near their
location. Vendor lock-in was also an important risk which IT
managers faced while deciding on the cloud
provider. If the cloud provider went out of business or it did not
meet service expectations, how easy
would it be for a consumer to transition to another cloud
provider?
Such questions acted as inhibitors for the adoption of cloud
16. services. Cloud providers were aware that
some consumers would never make the shift to cloud computing
because of these barriers to entry. Indeed,
some firms4 argued that cloud computing would fail to meet
expectations and enter what Gartner called the
“trough of disillusionment”5 in the hype cycle.
Major Cloud Computing Providers in India
The major computer software companies were already offering
basic cloud services in India. These largely
comprised email offerings, such as Hotmail, and Microsoft Live
services from Microsoft, Gmail from
Google and Yahoo mail. Salesforce.com led the way in the
customer relationship management (CRM)
software offerings. It allowed companies to build their own
CRM solution on Salesforce.com’s platform
and then hosted these services for a subscription fee. This
model of software delivery was an example of
‘software-on-demand.’
Amazon was the leader in the IaaS space, with its EC2 offering,
— the Elastic Cloud. It offered computing
power for a subscription fee in a highly scalable form. A client
could choose from various levels of
computing capacity and pay depending on the level of capacity
(see Exhibit 5). Another major provider
was Google, which introduced Google Apps in the SaaS space
and Google App Engine in the PaaS space.
With the Google App Engine, developers could build generic
applications hosted on Google’s
infrastructure using the App Engine platform.
17. 4 Leo King, “Cloud is overhyped says Brocade VP,” Network
World, October 1, 2010,
www.networkworld.com/news/2010/100110-cloud-is-
overhyped-says-brocade.html, accessed January 21, 2011.
5 Gartner Hype Cycle,
www.gartner.com/technology/research/methodologies/hype-
cycle.jsp, accessed January 21, 2011.
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MICROSOFT CORPORATION
Founded in 1975, Microsoft Corporation developed,
manufactured, licensed, sold and supported software
products. Microsoft initially began selling the MS-DOS
operating system, which was then followed by its
revolutionary Windows operating system technology. The
company’s initial public stock offering (IPO)
was in 1986.6 Microsoft’s wide range of products included its
operating system software, server
application software, business and consumer applications
software, software development tools, search
engine services and Internet and intranet software. The company
22. also developed video game consoles and
digital music entertainment devices7 (see Exhibit 6).
Microsoft in India
Microsoft entered India in 1990,8 and worked closely with the
Indian government, the IT industry,
academia and the local developer community, ushering in some
of the early successes in the realm of IT.
By 2008, Microsoft had offices in 16 cities in India. Since its
entry into India, Microsoft focused on three
things:
industry;
through its partner enablement programs;
jobs and opportunities and fostering
innovation through relevant, affordable access to computing.
In 2008, Microsoft India employed about 5,000 people and had
six business units in India representing the
complete Microsoft product lifecycle. Microsoft was divided
into five operating segments,10 all of which
were present in India (see Exhibit 7). Microsoft’s cloud
computing platform, Windows Azure, was a part
of the Server and Tools division.
Traditionally, Microsoft had been earning its revenue from the
sale of software licenses in India and the
rest of the world. There were single-user licenses for
individuals and volume licenses for large enterprises.
This business model had proved very profitable for Microsoft
23. over the years as it was a very high margin
business with negligible marginal costs. Microsoft’s 2009
annual report stated:
Our business model has been based upon customers paying a fee
to license software that
we develop and distribute. Under this license-based software
model, software developers
bear the costs of converting original ideas into software
products through investments in
research and development, offsetting these costs with the
revenue received from the
distribution of their products.
Microsoft Cloud Strategy
Arora recalled that Microsoft’s cloud strategy was defined four
years earlier:
6 “Facts about Microsoft,” Microsoft News Center,
www.microsoft.com/presspass/inside_ms.mspx, accessed
January 21,
2011.
7 “Microsoft Corp.,” Bloomberg,
www.bloomberg.com/apps/quote?ticker=MSFT:US, accessed
January 21, 2011.
8 “Microsoft in India — About Us,” Microsoft,
www.microsoft.com/india/msindia/msindia_aboutus.aspx,
accessed January 21,
2011.
9 “Corporate Citizenship,” Microsoft,
www.microsoft.com/About/CorporateCitizenship/en-us/,
24. accessed January 21, 2011.
10 “Microsoft 2009 Annual Report,” Microsoft,
www.microsoft.com/msft/reports/ar09/index.html, accessed
January 21, 2011.
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Four years ago, we took the opportunity to set some defining
rules around how computing
was adopted from the cloud. We grounded that thinking in three
governing pillars of our
cloud strategy:
license model and also
through the cloud. We believe that not everything will move to
the cloud; there will
always be a combination of cloud based and traditional license
models;
uing on the importance of combining both models, we
must be able to support
29. environments that work in a hybrid manner. Software may have
part of it running on-
premise and another part on the cloud, and these parts should be
able to interact and
work together seamlessly.
experience across a variety of
devices. We feel that devices like smart phones and e-readers
will play a significant
role in how computing is delivered and adopted by consumers
and businesses over
time. Whatever we do from the cloud has to serve a seamless
experience across a
variety of devices.
The ‘Software+Services’ strategy revolved around Microsoft’s
belief that traditional models of software —
in which consumers bought a license for a software product and
ran it on their personal desktops or on an
enterprise server — could coexist harmoniously with the new
subscription-based cloud services, and
empower the end-user in new and exciting ways. Given the
belief that ‘the sum of these technologies is
greater than its parts,’ Microsoft set out to engineer its products
and develop cloud offerings across the
spectrum of infrastructure, platform and software as a service.
Product Offerings
Software-as-a-service — Microsoft Online
Microsoft had ‘cloud-enabled’ many of its desktop services and
was offering these as subscription services.
30. The Business Productivity Online Suite (BPOS) was a suite of
productivity and collaboration tools
including Office, SharePoint and Live Meeting, offered as a
subscription service and forming a key part of
Microsoft’s SaaS strategy. It saved enterprises from having to
buy expensive licenses, from maintaining
hardware and from having expensive IT staff on its payroll.
Enterprises could pay for the software per use.
The company’s main competitor in this field was Google Apps,
which offered a packaged email and
desktop productivity solution for which it charged $50 per user
per year.11
Infrastructure and Platform-as-a-service — Microsoft Azure
Microsoft introduced Windows Azure in October 200812 as its
offering in the IaaS and the PaaS space.
However, this service was only introduced to a limited set of
developers in the community, labelled as a
‘Community Technology Preview’ (CTP). This gave developers
a chance to experiment with the
technology and give useful feedback to Microsoft, which the
company later incorporated in Azure’s
commercial model.
11 Google Apps Pricing,
www.google.com/apps/intl/en/business/features.html, accessed
January 21, 2011.
12 “Microsoft Unveils Windows Azure at Professional
Developers Conference,” Microsoft News Center,
www.microsoft.com/presspass/press/2008/oct08/10-
27PDCDay1PR.mspx, accessed on January 21, 2011.
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As a platform, Azure was positioned in the Infrastructure ++
category. This differentiated it from some of
the more ‘bare-bones’ infrastructure offerings, like Amazon’s
EC2, which offered the hardware resources
and allowed the user to scale those resources as and when
needed, maintaining the responsibility of the
software developer to manage the machine that Amazon
provided. This kind of service was available from
traditional web-hosting companies as well, and the presence of
Amazon’s EC2 was driving prices further
down. Azure offered this and much more. The software writer
was absolved from managing the machine.
All the developer had to do was provide Microsoft with the
software and documentation on how to run and
scale it — Microsoft would manage the rest. This was the Azure
value proposition. Cloud applications
would be built on top of Microsoft Azure, and would utilize the
cloud database SQL Azure and application
services called the AppFabric.
The technology — the relatively uncomplicated aspect — was
developed. Monetizing the technology into
36. an attractive business model for the long term was more
difficult. Which geographies would Microsoft
Azure be most valuable in, and how should Microsoft position
and price this offering?
Potential Market Segments in India
The Indian economy was growing rapidly since its liberalization
in the early 1990s, with an average annual
growth of over seven per cent since 1997. In the late 2000s, the
Indian economy was the fifth-largest in the
world by gross domestic product (GDP), based on purchasing
power parity. India’s large service industry
accounted for approximately 55 per cent of the country’s
GDP.13 Business services (information
technology, information technology-enabled services (ITeS) and
business process outsourcing) were
among the fastest-growing sectors, contributing to one-third of
the total output of services in 2000.
The rise of the business services sector was largely attributable
to outsourcing by many American and
European firms to reduce their costs of ownership of technology
and technology-enabled business
functions. However, the domestic consumption of IT in India
also showed a marked increase during this
period. According to IDC India, the total domestic market for
IT-ITeS would reach $45 billion in 2013, at
an annual growth rate of 15 per cent.14
In spite of the global recession in 2008, many Indian companies
were still profitable and expanding, as was
their spend on IT. Most companies used software applications to
keep costs low and also increase the
productivity of the workforce. This was true not only of the
37. large enterprises like manufacturing giants,
automobile companies and software firms, but also of the public
sector and the SMB segment. Microsoft
recognized this important opportunity in the Indian market and
discerned three potential segments as
targets for its cloud computing platform and services.
Government
The Indian government was focused on improving the speed of
its functioning as well as the quality and
accessibility of its operations by increasingly using IT where
possible. It approved the National e-
Governance Plan (NeGP),15 comprising 27 Mission Mode
Projects (MMPs) and eight components in May
13 “India: Economy,” CIA World FactBook, March 8, 2011,
www.cia.gov/library/publications/the-world-
factbook/geos/in.html,
accessed January 21, 2011.
14 IDC’s India ICT Market 2010 Trends Report Coverage,
www.communicationstoday.co.in/news/idcs-india-ict-market-
2010-
trends-report-reveals-2218-92.html, accessed on May 14, 2011.
15 Indian Government: National e-Governance Plan,
www.mit.gov.in/content/e-governance, accessed January 21,
2011.
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2006. The NeGP aimed to cooperate, collaborate and integrate
information across different departments in
the central (federal), state and local governments. Government
systems were characterized by islands of
legacy systems that used heterogeneous platforms and
technologies and were spread across diverse
geographical locations, in varying states of automation. Thus,
the integration of information across these
systems was very challenging. In order to effectively integrate
citizen and services data, the Indian
government was slated to increase its IT infrastructure and
capabilities considerably.
The turn of the new millennium saw an increased usage of the
Internet around the country. Services such
as Internet banking were becoming popular among the urban
Indian population and, consequently, were
being provided by most public and private sector banks. The
government had also made various services
— such as applying for a passport or a Permanent Account
Number (PAN), filing income tax returns,
paying property taxes and booking railway tickets — available
online to make them more easily accessible
to the general Indian population. In its 2008-2009 budget,16 the
Indian government increased its IT spend
on developing IT infrastructure by setting up broadband
Internet-enabled State Wide Area Networks (see
Exhibit 1).
43. Given its investment outlays in IT, India was a key segment for
Microsoft. It represented a largely risk-free
investment. Moreover, the company already had a relationship
with the government through several
projects that it could leverage to foster trust and confidence in
the benefits of the new technology.
Large Enterprises
According to Zinnov, large enterprises were companies having
more than 1,000 employees. An IDC study
estimated that the average IT spending in large enterprises was
$3 million in 2009-10, and this was
expected to grow by eight per cent in 2010-11. These figures
still amounted to an average of 0.75 per cent
of total revenues, leaving substantial room for growth.17 The
banking and financial services vertical was
the largest spender, averaging an annual spend of about $8.5
million on IT.
Large enterprises were significant sources of profit for software
companies. IT requirements were
significant and software companies usually gained a large
portion of their revenues through the sale of
licenses to these organizations. Microsoft already had strong
relationships with almost all the large
companies in India, where it was the key operation system and
productivity tools provider. It should have
been easy, therefore, for Microsoft to sell its cloud offerings to
these companies. However, large
enterprises were inherently inflexible due to the significant
capital invested in their IT infrastructures. This
reluctance could prove a potential stumbling block for a
transition to cloud. Concerns of data security,
44. service reliability and vendor lock-in were especially
pronounced in this segment as well.
Small and Medium Businesses (SMBs)
Traditionally, India had a large number of SMBs (see Exhibit
8). One reason for this was the prevalence of
family businesses, in which members of a generation often
carried forward and expanded the business
started by the previous generation. In addition, SMBs across
different industries such as retail, health care,
hospitality, real estate and education were typically focused on
specialized, core strengths. They had
16 Ministry of Finance, Government of India, Indian Budget
2008-2009,http://indiabudget.nic.in/ub2008-09/bh/bh1.pdf,
accessed January 21, 2011.
17 Stuti Das, “IT Spendings back with a bang to increase by
7.7% in FY 11,” Dataquest, June 11, 2010,
http://dqindia.ciol.com/content/top_stories/2010/110061101.asp,
accessed January 21, 2011.
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49. neither the in-house IT expertise to create their own software
nor the capacity to invest in huge IT
infrastructure. Software solutions for such companies were
typically designed, developed and (at times)
customized by independent software vendors (ISVs), including
small IT firms. Like the SMBs they
serviced, the ISVs were often spread across different parts of
the country.
Rajiv Sodhi, director for online business, Microsoft India, made
some unique points to Arora about Indian
SMBs:
India is home to about 3.9 to four million small businesses with
less than 100 employees.
Medium businesses are around 35,000 in number. To target the
Indian SMB, the three key
points that Microsoft needs to keep in mind are: a) build
awareness of how IT can help
SMBs; b) offer an affordable solution since the Indian SMB
entrepreneur is fairly price
sensitive, does not have deep pockets and would make any
investment decision only after
s/he was convinced of the return on investment (RoI); c) make
the applications relevant to
the problems and situations of these businesses.
Sodhi further added that India had a “do it for me” attitude, in
contrast to the “do it yourself” attitude more
prevalent in the West. Indian SMB entrepreneurs were not very
proactive about technology. Hence, there
was a need to educate them and increase awareness about the
50. benefits of the available technologies. Face-
to-face time was another important aspect of business in India,
and one that could not be replaced by
Internet technology: “There is only so much mileage to be
achieved if we attempt to reach SMBs using our
websites alone,” Sodhi emphasized. Finally, this would be a
game of scale: “Even to capture 10 per cent of
the SMB market, we need to win 350,000 customers,” Sodhi
stressed. It would be substantially easier for
Microsoft to target the government and large enterprises with
which it already had existing relationships.
These organizations were largely stable and provided Microsoft
with a significant revenue opportunity.
The companies (typically ISVs) that created offerings targeted
at SMBs always kept the following in mind:
adoption could help solve some of their
complex business problems,
require high capital investments,
increasingly adopt IT solutions to solve
their business problems (see Exhibit 2).
Challenges and Risks in the Indian Market
The key challenges that Microsoft or any cloud service provider
faced were the insecurities of the business
owner, since cloud technology was perceived to be indicative of
lower data integrity and security. Sodhi
51. reasoned that this was similar to the early days of the banking
industry, when people felt more comfortable
storing their savings at home rather than in the bank — a
perception that changed as the banking industry
matured.
Another important dimension that Microsoft had to consider was
that some Indian SMBs, like many
counterparts in South East Asia, did not pay for their software.
Piracy was rampant in India. Would the
cloud-related reduced costs of software entice people to actually
buy the software rather than obtain it
through piracy?
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The relatively inexpensive and easily available labour force in
India posed another significant challenge for
Microsoft. Would the SMBs or government be encouraged to
invest in IT when certain tasks could be done
by hiring more people, rather than investing in IT?
Last, but certainly not least, a very reliable broadband
56. infrastructure was essential for increasing the
adoption of cloud computing services. While the penetration of
broadband had improved over the last few
years, it would still be a while before affordable, reliable
broadband connections became easily available
across the country (see Exhibit 3).
The Microsoft Advantage
Microsoft had an advantage in that it did not specialize in any
vertical industry but instead provided
applications and products as a horizontal industry. It provided
productivity tools, email and chat
applications, portals and other services required across
numerous industries. With the company’s
significant capabilities and expertise, Microsoft would be able
to deliver both cloud and on-premise
offerings to its customers. Initially, however, customers would
deploy a combination of cloud and on-
premise solutions, instead of moving directly to a cloud-only
environment. The disadvantage of targeting
the fragmented SMB market in India was that the costs would
be ‘front loaded’ — companies would need
to be educated on the benefits of IT adoption in general and
cloud service in particular; however, if
education was necessary, Microsoft could leverage the reach of
its partners and channel resellers who had
more direct contact with the end-customer.
Another key strength was that Microsoft had a strong existing
relationship with Indian ISVs. These ISVs
— around 1,30018 in number in the late 2000s — had
traditionally worked on the Microsoft Windows
platform, using Microsoft development tools. Hence, the
learning curve in moving to cloud-based
57. applications was not expected to be too steep.
Decision Time
The influx of global corporations in India had increased
competition and resulted in improved operational
efficiency through IT. Furthermore, the recent global financial
crisis had seen many SMBs in the United
States and Europe merging with or being acquired by Indian
companies. These mergers often mandated the
incorporation of advanced technologies to maintain efficiency
standards and better coordination between
the partners, necessitating Indian SMBs to support the IT
systems and software that were in use by the
acquired company, as well as upgrade their own software to
integrate both parts of the newly formed
company (see Exhibit 9).
Arora was convinced that India Inc. was growing and that most
sectors were systematically increasing their
IT spend. The Zinnov study19 estimated the global cloud
computing market to be over $70 billion by 2015.
India, with its powerful ecosystem of over 1,300 ISVs, 1.4
million developers and more than 11,000
system integrators (SIs) and custom software development
organizations, was ideally poised to capitalize
on this growing opportunity. Furthermore, the Indian
government was increasingly focusing on e-
governance and actively encouraging IT adoption by Indian
industry.
18 www.microsoft.com/india/msindia/pressreleases/cloud-
services-will-create-over-300-000-jobs-in-india-by-2015/218/,
accessed January 21, 2011.
58. 19 “Cloud Service Will Create Over 300,000 Jobs in India By
2015,” Microsoft, May 27, 2010,
www.microsoft.com/india/msindia/Details.aspx?Id=218,
accessed January 21, 2011.
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Microsoft was acutely aware of the need to carefully balance
newer revenue streams like cloud services
with its licensing model that was a stable, predictable and
growing source of revenue. Why should
Microsoft cannibalize a revenue stream that remained
potentially lucrative and was integral to its growth?
However, with the growth of competing cloud services, open-
source software and other Internet-based
technology delivery models such as advertising-supported
applications, Microsoft recognized the need to
diversify its revenue stream with a hybrid business model.
These models were not only less expensive but
they allowed for unbundling of product features, which in turn
allowed for faster and more agile evolution
of the core product. Newer features could be released
incrementally and did not have to wait for the next
product version release. Customers would clearly recognize the
63. benefits of leaner operating systems that
were complemented with on-demand software applications and
services. Microsoft needed to decide which
services would be licensed and which would be provided on the
cloud. A nuanced product strategy was in
order.
Considering that the Indian customer would be price-sensitive,
Arora also had to work out a pricing
strategy that would provide Microsoft with sufficient revenues
while appealing to the budget-savvy
customer.
Several important questions remained, and the answers would
determine if Azure could be a success in
India:
enterprises. Should it introduce Azure, focusing
on large enterprises alone? What should the product strategy for
this segment look like?
rtnerships with ISVs and SMBs?
different industries?
adopt a different pricing strategy for
India from the rest of the world?
Arora knew he had a challenging task at hand. It was time to
move — but how radically and in which
direction?
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Exhibit 1
INDIAN BUDGET 2008-2009 EXCERPTS
Government IT Spend and build-up of IT infrastructure
Allocation to the Department of Information Technology
enhanced to Rs.1,680 crore ($382 million) in
2008-09 from Rs.1,500 crore ($340 million) in 2007-08; Two
Schemes for establishing 100,000
broadband Internet-enabled Common Service Centres in rural
areas and State Wide Area Networks
(SWAN) with Central assistance under implementation; new
scheme for State Data Centres also
approved; Rs.75 crore ($17 million) provided for the common
service centres; Rs.450 crore ($102 million)
provided for SWAN and Rs.275 crore ($62 million) for the State
Data Centres.
69. Tax rebates for small service industry
Threshold limit of exemption for small service providers
increased from $18,000 per year to $23,000 per
year; about 65,000 small service providers exited the tax net.
Source: Key features of budget, 2008-9, Ministry of Finance,
Government of India, http://indiabudget.nic.in/ub2008-
09/bh/bh1.pdf.
Note: All Internet references have been accessed on January 21,
2011 and were active as of that date.
Exhibit 2
GOVERNMENT ENCOURAGES SMB UPGRADE OF IT
INFRASTRUCTURE
Dated March 2008
The weaknesses of Indian pharmaceutical SMBs include: lack of
expertise, training and finance for
technological up-gradation, lack of adoption of good
manufacturing practices (GMP) to meet global quality
standards, limited exposure and expertise on IPR [Intellectual
Property Rights] issues, limited adoption of
information technology (IT) techniques in production and
processes, and low or negligible R&D [research
and development] expenditure (among others). Under a Central
government program, a “major
promotional package” has been announced to provide full
support to the SMBs in the areas of credit,
technological up-gradation, marketing and up-gradation of
70. industrial infrastructure.
Source: Problems faced by small and medium pharmaceutical
companies, Department of Science and Technology,
Government of India, March 11, 2008,
www.dst.gov.in/whats_new/press-release08/problems-
pharmaceutical-companies.htm.
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Exhibit 3
BROADBAND PENETRATION AND PIRACY IN INDIA
Broadband penetration:
Multiple research studies have shown dispersion of Internet
service has a profound impact on the growth
of an economy. In India, Internet services did not experience as
high growth rates as the proliferation of
fixed and mobile services. Based on a 2006 TRAI (Telecom
Regulatory Authority of India) press release,
total Internet connections in India had reached 6.8 million, and
75. total broadband connections (>256 kbps
download speed) had reached 1.3 million. Simultaneously,
according to the 17th Survey Report on
Internet development in China, published in January 2006, the
total Internet connections in China were
close to 111 million. Considering that India and China were the
fastest growing economies, and rivals in
the IT and IT-related sectors, China was miles ahead in terms of
proliferation of Internet services in 2006.
Source: Telecom Regulatory Authority of India, Press Release
[36/2006],
www.trai.gov.in/trai/upload/pressreleases/308/pr10apr06.pdf
Piracy in India:
Although the Government, judiciary and the software vendors
were taking major steps to curb the extent
of piracy in India, it was still a far-reaching and serious
problem. According to the 2007 BSA and IDC
Global Software Piracy Study, India ranked in the top 50
countries for software piracy. Seventy-one per
cent of all software units installed in India in 2006 were pirated,
amounting to a loss in revenue to the tune
of $1,275 million.
Source: BSA and IDC Global Software Piracy Study, 2007,
http://global.bsa.org/idcglobalstudy2007/studies/2007_global_pi
racy_study.pdf.
Exhibit 4
ZINNOV STUDY FINDINGS
NOTES:
76. The government has prioritized the penetration of broadband in
SMBs over the corporate sector:
copper local loops to broadband
connections.
from broadband is expected to be $90
billion from years 2010 to 2020.
the villages for basic usage and to
connect to e-Governance sites.
broadband connectivity which will help
introduce the power of Internet protocol televisions (IPTV) that
could eventually bring business
process outsourcing companies (BPOs) to locate in India’s
villages.
Figure 1: Software Spending Breakup — SMB (2007)
accounting packages, etc.)
applications, business intelligence, etc.
whereas operating systems accounted for the
remaining 10%
88. AMAZON’S PRICING MODEL
Source: “Amazon EC2 Pricing,” Amazon Web Services,
http://aws.amazon.com/ec2/pricing.
Exhibit 6
MICROSOFT EARNINGS HISTORY
Source: Microsoft Investor Relations, Trended Historical
Financials,
www.microsoft.com/investor/EarningsAndFinancials/TrendedHi
story/default.aspx
Linux/Unix Usage Windows Usage
Standard On-Demand Instances
Small (Default) $0.095 per hour $0.12 per hour
Large $0.38 per hour $0.48 per hour
Extra Large $0.76 per hour $0.96 per hour
High Memory On-Demand Instances
Extra Large $0.57 per hour $0.62 per hour
Double Extra Large $1.34 per hour $1.44 per hour
89. Quadruple Extra Large $2.68 per hour $2.88 per hour
High CPU On-Demand Instances
Medium $0.19 per hour $0.29 per hour
Extra Large $0.76 per hour $1.16 per hour
FY06 FY07 FY08 FY09 FY10
44,282 51,122 60,420 58,437 62,484
Operating expenses:
7,650 10,693 11,598 12,155 12,395
6,584 7,121 8,164 9,010 8,714
0 0 0 0 0
9,910 11,541 13,260 12,879 13,214
3,758 3,329 5,127 3,700 4,004
0 0 0 330 59
0 0 0 0 0
27,902 32,684 38,149 38,074 38,386
16,380 18,438 22,271 20,363 24,098
Employee severance
Other expenses
Revenue
Total operating expenses
Operating income
90. In $ millions, except earnings per share
Cost of revenue
Research and development
Acquired in-process technology
Sales and marketing
General and administrative
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Exhibit 7
MICROSOFT’S OPERATING SEGMENTS
Client had overall responsibility for technical architecture,
engineering, and delivery of the Windows
product family (operating systems) and was responsible for
Microsoft’s relationships with personal
computer manufacturers, including multinational and regional
95. original equipment manufacturers
(OEMs). The OEM channel accounted for over 80 per cent of
total Client revenue. Global
revenue/operating income for this segment is given below.
(in millions, except
percentages) 2009 2008 2007
% Change
2009 versus
2008
% Change
2008 versus
2007
Revenue $14,712 $16,865 $14,911 (13) 13
Operating income $10,856 $13,105 $11,424 (17) 15
Server and Tools developed and marketed software server
products, software developer tools,
services, and solutions. Windows server-based products
included the server platform which
contained targeted segment solutions, database, storage,
management and operations, service-
oriented architecture platform, and security and identity
software. Server products can be run on-site,
in a partner-hosted environment, or in a Microsoft-hosted
environment. Approximately 50 per cent of
96. Server and Tools revenue comes from multi-year licensing
agreements, approximately 20 per cent is
purchased through fully packaged product and transactional
volume licensing programs, and
approximately 10 per cent comes from licenses sold to OEMs.
The remainder of Server and Tools
revenue comes from consulting and product and solution
support services. Global revenue/operating
income for this segment is given below.
(in millions, except
percentages) 2009 2008 2007
% Change 2009
versus 2008
% Change 2008
versus 2007
Revenue $14,126 $13,102 $11,104 8 18
Operating income $5,327 $4,539 $3,571 17 27
The Online Services Business (OSB) consists of an online
advertising platform with offerings for both
publishers and advertisers including online information
offerings such as Bing, MSN Portals and
channels, and personal communication services such as email
and instant messaging around the
world. Revenue is primarily from online advertising, including
search, display, and email and
messaging services. Global revenue/operating income for this
97. segment is given below.
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Page 16 9B11E026
Exhibit 7 (continued)
(in millions, except
percentages) 2009 2008 2007
% Change 2009
versus 2008
% Change 2008
versus 2007
Revenue $3,088 $3,214 $2,434 (4) 32
Operating income ($2,253) ($1,222) ($604) (84) (102)
Microsoft Business Division (MBD) offerings consist of the
102. Microsoft Office system and Microsoft
Dynamics business solutions. While Microsoft Office is a suite
of productivity tools, Microsoft
Dynamics CRM business provides solutions for financial
management, customer relationship
management, supply chain management, and analytics
applications. Global revenue/operating
income for this segment is given below.
(in millions, except
percentages) 2009 2008 2007
% Change 2009
versus 2008
% Change 2008
versus 2007
Revenue $18,894 $18,929 $16,476 * 15
Operating income $12,141 $12,369 $10,838 (2) 14
* Not meaningful
The Entertainment and Devices Division (EDD) is responsible
for developing, producing, and
marketing the Xbox video game system, including consoles and
accessories, third-party games,
games published under the Microsoft brand, and Xbox Live
operations, as well as research, sales,
and support of those products. Global revenue/operating income
103. for this segment is given below.
(in millions, except
percentages) 2009 2008 2007
% Change 2009
versus 2008
% Change 2008
versus 2007
Revenue $7,753 $8,206 $6,139 (6) 34
Operating income $169 $497 ($1,898) (66) *
* Not Meaningful
Source: Microsoft, 2009, 10-K,
www.microsoft.com/investor/reports/ar09/downloads/MS_2009_
AR.doc.
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108. RESERVE BANK OF INDIA (RBI) DEFINITION OF AN SME
At present, a small-scale industrial unit is an undertaking in
which investment in plant and machinery,
does not exceed $227,000, except in respect of certain specified
items under hosiery, hand tools, drugs
and pharmaceuticals, stationery items and sports goods, where
this investment limit has been enhanced
to $1,100,000. A comprehensive legislation which would enable
the paradigm shift from small scale
industry (SSI) to small and medium enterprises is under
consideration of Parliament. Pending enactment
of the above legislation, current SSI/ tiny industries definition
may continue. Units with investment in plant
and machinery in excess of SSI limit and up to $2,200,000 may
be treated as Medium Enterprises (ME).
Source:
www.rbi.org.in/scripts/NotificationUser.aspx?Id=2456&Mode=.
Exhibit 9
INDIAN SMES ACQUISITION OF INTERNATIONAL FIRMS
— NEWSPAPER ARTICLE
Small is big: SMEs on overseas drive
Move over Tatas and Birlas. A new wave of small and mid-sized
‘Indian multinationals’ is creating ripples
109. on the global M&A stage. Even as inorganic growth
opportunities within India become scarce, the
economic downturn of Europe and North America has thrown up
attractive opportunities for acquisitions.
An increasing number of Indian companies are making bids —
at times audacious — to gobble up
overseas firms. So even though it’s the big ticket acquisitions
that capture our imagination, the small and
medium companies are increasingly riding the M&A wave
abroad. As a result, the trend has brought into
the spotlight budding multinationals from India.
“We are definitely witnessing an increase in outbound
transactions by Indian companies over the last
couple of months. These companies are from newer segments
such as industrial products, chemicals,
and even some consumer product brands that are growing
steadily within India,” says Ajay Arora, partner,
transactions advisory services, Ernst & Young.
Companies are increasingly expanding their markets beyond the
Indian borders – either to access new,
cutting-edge technologies or in search of natural resources.
Since January 2010, there have been around
35 overseas deals struck by Indian companies. The figure is
comparatively large as against the over 40
deals sealed in entire 2009. Apart from larger deals, such as
Bharti Airtel’s acquisition of Zain Africa
($10.7 billion), Hindustan Zinc’s acquisition of Anglo-
American Zinc ($1.3 billion) in Namibia and Jindal
Steel & Power’s acquisition of Shadeed Iron & Steel in Oman
($464 million), the landscape is dotted with
many small to mid-sized deals like Banco Products’ acquisition
of Nederlandse Radiateuren Fabriek of
Netherlands ($24 million), Inox India’s majority stake buy in
Cryogenic Vessel Alternatives (CVA) of US
110. ($140 million), Crompton Greaves’ acquisition of Power
Technology
Solution
s in the UK ($45 million),
Hindustan Construction Company’s acquisition of a 66 per cent
stake in Karl Steiner AG ($33 million),
among a host of others.
There are many opportunities for Indian companies to globalize
across sectors, including the mid-IT
space. Africa has witnessed many deals in the consumer
products and telecom space. Distressed assets
in Europe are now also prime targets for acquisitions. “Six
months ago, such an endeavour was not
possible for Indian companies due to financing constraints.
Today, balance sheets are much stronger and
companies are on a better footing to acquire companies
overseas,” says Sanjeev Krishan, executive
director/partner, transactions group, PricewaterhouseCooper
(PwC). Clearly, high interest burden and
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Exhibit 9 (continued)
liquidity crunch are no longer the stumbling blocks in India
Inc’s endeavour to make overseas
acquisitions.
“In 2007, total offshore investment by Indian corporates was to
the tune of approximately $32.9 billion. It
is fair to say that the transformation of Indian SMEs into Indian
MNCs is well underway,” says Bharat
Anand, partner, Khaitan & Co, the New Delhi-based firm which
helped Suzlon in its acquisition of Hansen
Transmission and Inox’s purchase of CVA.
With CVA being the world’s largest manufacturer of cryogenic
transportation equipment, Inox India has
secured its position as a global player in the short span, offering
total solutions in cryogenic storage,
transportation and distribution engineering across nearly 100
118. countries with exports accounting for almost
60 per cent of its turnover.
There are some companies which belong to larger groups and,
by virtue of that, have a global presence.
Some of the lesser known or smaller Tata companies too have
hit the M&A trail. For instance, TRF, in
April, acquired UK’s Hewitt Robins International. Says Rajesh
R Jumani, chief marketing officer, Tata
Interactive Systems, “In an increasingly flat world, it is often
more advantageous to collaborate rather than
compete. We can synergize our mutual strengths, reach out to
untapped markets or strengthen our
positions and meet local needs more effectively.”
A few years ago, Tata Interactive Systems, a pioneer in e-
learning, acquired Tertia Edusoft’s Germany
and Switzerland business. The acquisitions have acted as a
force-multiplier for the company, helping it
ramp up the scale of its operations in Europe. “On the other
hand, it has also helped us take formerly
localized products to a wider, global audience. So it’s mutually
beneficial. After all, ultimately all initiatives
need to make business sense,” says Jumani. There is no doubt
that the Tatas’ acquisitions of Corus and
119. Jaguar Land Rover, followed by Reliance’s audacious bid for
Lyondell Basell and Bharti’s Zain buy, have
made small and mid-size Indian companies (SMEs) to venture
offshore. Godrej Consumer Products, part
of the Godrej group, has made four outbound deals so far this
year. The company has said it continues to
look out for target companies in overseas markets.
In the pharma space, Avantha Group acquired Pyramid
Healthcare