Expanding clouds, new risks
Expanding Clouds, New Risks
Microsoft’s Q2 earnings reports came out on Wednesday with positive news for the company.1 Azure, Microsoft’s cloud platform, saw impressive growth of 62% year-over-year and broader cloud services revenue increased 30%. For years Microsoft, under the leadership of CEO Satya Nadella, has been pushing towards a services-based business. The strategy has focused on the growth of the cloud while providing consumers with access to the Microsoft platform on any device (even at the cost of some software and hardware sales). Those interested in this latest earning report have questioned the specifics of Azure’s growth, as the way the growth is categorized makes it difficult to compare Azure to AWS (and other cloud platforms).2 Despite this, the Q2 report underscores the importance of the cloud to the continued success of Microsoft.
Microsoft’s cloud growth should not be surprising for those following closely. If you look back at the past five years of annual reports put out by the company, the need to invest in the cloud is mentioned. In particular, infrastructure investment has been the top priority. Take a look at select quotes from the reports:
“This strategy requires continuing investment in datacenters and other infrastructure to support our services.” (Annual Report 2016)3
“…we are investing aggressively to build Azure as the world’s computer. We expanded our global datacenter footprint to 54 regions — more than any other cloud provider — and with the most comprehensive compliance coverage in the industry to meet evolving regulatory needs, creating broader economic benefit and opportunity in local markets on six continents.” (Annual Report 2018)4
“The investments we are making in infrastructure and devices will continue to increase our operating costs and may decrease our operating margins.” (Annual Report 2017 / 2019)5
Microsoft is taking on new forms of risks by aggressively moving towards a cloud-first business. Of course, there is the unlikely possibility that computing will move away from hyper-scale clouds and towards individual nodes. A more realistic danger is that infrastructural disruptions in the cloud will cause massive issues for users. Physical or digital attacks (intentional or accidental) on the cloud’s infrastructure would pose a real threat to the security of our distributed computing platforms. The potential severity of any widespread issues only increases as we continue to build our computing landscape around the logic of the cloud. This is a risk that Microsoft fully acknowledges and has included in their most recent earnings report and in previous filing with the SEC.[^ 6]
Full quote of the risks:
“We may have excessive outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure. Our increasing user traffic, growth in services, and the complexity of our products and services demand more computing power. We spend substantial amounts to build, purchase, or lease datacenters and equipment and to upgrade our technology and network infrastructure to handle more traffic on our websites and in our datacenters. These demands continue to increase as we introduce new products and services and support the growth of existing services such as Bing, Azure, Microsoft Account services, Office 365, Microsoft Teams, Dynamics 365, OneDrive, SharePoint Online, Skype, Xbox Live, and Outlook.com. We are rapidly growing our business of providing a platform and back-end hosting for services provided by third parties to their end users. Maintaining, securing, and expanding this infrastructure is expensive and complex. It requires that we maintain an Internet connectivity infrastructure that is robust and reliable within competitive and regulatory constraints that continue to evolve. Inefficiencies or operational failures, including temporary or permanent loss of customer data or insufficient Internet connectivity, could diminish the quality of our products, services, and user experience resulting in contractual liability, claims by customers and other third parties, regulatory actions, damage to our reputation, and loss of current and potential users, subscribers, and advertisers, each of which may adversely impact our consolidated financial statements.” (Q2 Earnings)
Microsoft is not alone in trying to build the most robust and widespread cloud network. The application of the cloud, as we currently use it, lends itself to a sprint towards substantial infrastructure build out. This is true for both global and local applications. Hyper-cloud providers need to be in as many countries as they can, not only to reduce latency but also to conform to national laws and to build additional redundancy into their networks. Mitigating risks requires not only the construction of more datacenters, but also the protection of the other physical and digital assets that carry cloud traffic across the globe.
Even the most actively managed networks will have issues from time to time. It is essential to anticipate what the consequences will be if we continue to move towards a future in which we rely on large cloud arrays to support most of our digital lives. Hopefully, these are questions that Microsoft and other cloud providers are thinking deeply about. More importantly, I hope the public starts to consider these issues as well.