After reaching $10 billion in annual revenues this year, Amazon Web Services already looks like the victor in the race to become champion of the cloud. But something interesting is happening as AWS moves into its second decade. The battle to win the cloud platform wars is moving into the application layer.
To some extent the bigger market always has been further up the stack. Enterprise spending on SaaS offerings such as Salesforce CRM, Concur T&E and Workday HCM has always dwarfed spending on IaaS. While it’s impressive that AWS has reached the $10 billion revenue milestone a couple of years ahead of Salesforce, which has publicly targeted it for longer, it has done so by dominating a far smaller market.
As Amazon considers how to continue to fuel its growth, its management knows that it, too, must extend up the stack rather than depending on infrastructure alone for its livelihood. Ask any telecoms provider. You can make a living renting out the pipes, but that’s a commodity business. The value lies in what they carry.
Amazon’s most formidable opponent in this regard is Microsoft, much more so after last week’s announcement of its Dynamics 365 cloud business applications suite and AppSource third-party ecosystem. Its surprising ally in that battle is Salesforce, the vendor with most to lose from Microsoft’s latest assault.
Microsoft’s cloud-native coming-of-age
Dynamics 365 heralds Microsoft’s coming-of-age as a cloud-native business applications vendor. Due to be available later this year, at which time pricing will be announced, Dynamics 365 brings together three different business applications:
- An expanded version of Microsoft’s longstanding cloud-native Dynamics CRM product, incorporating not only sales, marketing and customer service, but also field service and project service automation.
- A new release of Dynamics AX, the cloud-native ERP product that debuted late last year.
- An all-new cloud-native financials product for small business called Dynamics 365 Financials for Business. This was formerly codenamed Project Madeira and has its roots in, but is separate from, the existing Dynamics NAV product.
These applications, which can be licensed either independently, as a suite, or in role-based slices of functionality, all run on the Azure cloud platform and are designed to work together, as Microsoft CEO Satya Nadella made clear in his keynote speech at this week’s Worldwide Partner Conference in Toronto:
The most transformative thing is the data — the fact that you have the leads, orders, shipments, inventory, field service orders, everything represented in the cloud, exposed in the cloud, for others to build, extend, is what’s going to make the difference.
AppSource vs AppExchange
And in a demonstration of the old adage that imitation truly is the sincerest form of flattery, this new platform comes with an AppSource ecosystem of third-party applications that bears a striking resemblance to the Salesforce AppExchange. It’s surely no coincidence that Microsoft’s new corporate vice president of its partner strategy and ecosystem, Ron Huddleston, was recruited just last month from a similar role at Salesforce, where as his LinkedIn profile shows, he presided over the growth of the AppExchange ecosystem for almost eight years.
Microsoft is pitching AppSource to partners as a significant new conduit for them to reach prospects, as corporate vice president James Phillips told attendees:
Office 365, Dynamics 365, Power BI, Power Apps, Microsoft Flow, all of those services will use AppSource as their native get new app capability and through that movement of users through the service we also offer the ability for our partners to show off their solutions.
This is a model that has helped drive massive growth for Salesforce and if executed effectively is poised to do the same for Microsoft. AppSource may be new but Microsoft already has a well established partner ecosystem standing by to take advantage of it. It is also able to differentiate against Salesforce by crucially having financials and ERP within its cloud as well as the massive incumbency of Office 365 around it, extending far beyond the functionality that’s native to the Salesforce platform. As Microsoft told ZDNet’s Mary Jo Foley last week, the Office 365 piece is integral to the offering:
The common data model is a cloud-resident business database, built on years of experience with our enterprise customers. It will come with hundreds of standard business entities spanning both business process (Dynamics 365) and productivity (Office 365). The standardization and consistency of schema enables partners to build innovative applications and to automate business processes spanning the entire business process spectrum with confidence their solutions can be easily deployed and used across Microsoft’s entire customer base.
Why this all matters to Amazon is because the overriding objective is to drive enterprises to Azure as the underlying cloud platform. As Kirk Krappe, CEO of Apttus, the Salesforce-native quote-to-cash vendor that added Azure as its second platform earlier this year, told me last week:
Microsoft’s strategy is really interesting right now. Microsoft cares about Azure. I’m not saying they don’t care about apps, I’m not talking about Office 365, but they care about Azure consumption. That’s their big push.
They’re buying all these interesting technologies like machine learning, HoloLens, Cortana. They put it in there free, because they want people to run an app or build an app that consumes it. When it consumes it, then you pay for your Azure consumption.
With this context revealed, the $400 million deal that Salesforce struck with Amazon in May to port more of its infrastructure to AWS makes a lot more sense. As a source told The Register, this wasn’t a popular decision internally but the logic was compelling:
There was a pitched battle and AWS so clearly demonstrated its superiority that there was no way to justify an internal placement.
Having narrowly avoided being bought by Microsoft last year, Salesforce is now firmly in bed with Amazon (and even rumored as a potential acquisition target). It will need all the friends it can get to battle the fresh competition Microsoft’s latest announcements will bring to market.
Developing serverless apps
But there’s another dimension to this story in which both Microsoft and Salesforce could lose out to a new generation of applications being nurtured by AWS. Although the cloud has transformed the way that business applications are built today, there’s still a lot of what Amazon might call legacy thinking going into the way they’re architected. Their pedigree is one in which functionality was built in discrete silos and then joined together through integrating data and processes from one database or application server to another.
AWS has recently started to champion a new way of building applications that doesn’t start with servers at all. Instead developers can harness its Lambda service to react to events and call whatever other services are needed to deliver an outcome. CTO Werner Vogels promoted this “serverless” approach to application development at last week’s AWS Summit in London, citing Thomson Reuters, Coca Cola and Twilio among others as enterprise users of the technology.
Complete apps are being stripped of all their servers and only code’s being run.
David Wascha, global director of digital products at currency exchange provider Travelex described how the company had built an application to handle signups for its new Supercard mobile application and currency payment card using this serverless approach. Two developers spent just four weeks to create an application that was more scalable than earlier versions proposed at much higher cost by third-party development houses, he said. Handling as many as 20,000 user sign-ups per hour, the application’s operating costs for the past two months had been less than £1,000 ($1.34k) he added.
This serverless approach to app development is still at a very early adopter phase, but then so was the notion of pay-as-you-go cloud computing a decade ago. Chatting to RedMonk analyst James Governor as he and I emerged from the auditorium, we agreed that this was one of those AWS innovations that has the potential to become bigger than anyone expects in years to come.
In which case who wins the looming battle between Microsoft and Salesforce for dominance of the enterprise cloud application landscape is immaterial. The cloud wars will finally be won in another theater entirely.
[Corrected from an earlier version where for some reason I wrote AppCloud a few times when I meant AppSource].
Image credit - by @philww
Disclosure - Salesforce is a diginomica premier partner at time of writing.