Microsoft Azure is a teen now. Will an AI infusion lead to a further growth spurt?

February 2, 2023
Azure has come a long way since it launched as a Platform-as-a-Service (PaaS) service in 2010. And the way it evolves going forward could impact Microsoft customers in key ways.
A blue sky with clouds and skyscrapers

It was 13 years ago this week that Microsoft "turned on" its Azure public cloud service by making it generally available. Even though Microsoft was four years behind AWS in getting into the market, it did a lot to catch up fast. Now, all eyes are on how Microsoft plans to try to continue to grow Azure and differentiate itself from the competition—and how those moves could affect its customers.

Since its start as codename "Red Dog," Azure encountered more than a few speed bumps. Microsoft launched Windows Azure, as it was known originally, as a PaaS play only. Later, Microsoft officials saw the money and customer demand was in the Infrastructure-as-a-Service (IaaS) space. Customers wanted a quick way to get into the cloud without having to rewrite their apps and IaaS looked like the best option.

Two years after Azure's launch, Microsoft shifted gears and enabled support for Linux on Azure. The course correction worked and by 2018, "about half" of Azure VMs were running Linux, not Windows Server, officials said. (Microsoft hasn't provided publicly an updated number beyond that, as far as I know.)

Microsoft originally was expecting Azure to host its own internal services, like Bing and Hotmail (much the same way that Amazon originally looked at AWS as a way to run its retail operations). Microsoft still hasn't managed to get Exchange, SharePoint or Bing completely rehosted on Azure, but it has launched its newer services, like Teams and Xbox Cloud Gaming, on Azure. And like AWS, Microsoft subsequently made available excess compute and storage to other software vendors, customers and partners while growing its set of commercially available Azure services.

"What’s amazing to me is that Microsoft has pretty much caught up technically with AWS to the extent that you can think of most cloud services as commodities, which is quite an achievement," says Directions on Microsoft analyst Barry Briggs. "Core and PaaS services are pretty much equivalent and mature."

So what's coming in the next 13-plus years for Azure, especially given its growth is slowing, as officials admitted during the company's most recent earnings call? Right now, Microsoft seems to be putting a lot of focus on AI as a potential differentiator. It recently made generally available the Azure OpenAI service, which adds enterprise capabilities like compliance, security and management on top of OpenAI's models (which are trained on Azure). And Azure OpenAI is set to get a ChatGPT natural-language chat bot addition, possibly before February is over.

But AI isn't the only place Microsoft is likely to try to gain mind and market share with Azure.

"I think MS now differentiates by leveraging Microsoft 365 integration, its integration with on-premises (where it's way, way ahead), and its move into verticals. AWS differentiates by virtue of scale and its investments in custom hardware (Annapurna acquisition which led to Graviton, Nitro, and Inferentia)," says Directions' Briggs.

Directions on Microsoft analyst Rob Helm agrees: "As for what will allow Azure to catch up with Amazon: It may come down to what worked for Office and many other Microsoft products: Licensing, especially bundling into enterprise-wide licensing contracts."