Leaked numbers show Microsoft's push to move customers to its cloud is working
And people who closely follow the company are starting to ask questions about how many customers are really using its cloud (known as "consumption" or "usage"), and how much revenue is coming from this trick.
Microsoft isn't ready to talk publicly about those numbers.
But a source has shared some of some of them with us.
Various sources have also shared details of how Microsoft is fixing this cloud consumption problem. It is pressuring its salespeople not just to sell the cloud, but actually to get their customers to use it.
Some salespeople are not happy with the change, and at risk for bad employee reviews, smaller bonuses and paychecks, and pressure to leave the company - even if they sell a lot of other Microsoft software.
But the numbers suggest the tactic is working. And it all shows how serious Microsoft is about getting its longstanding enterprise customers - its biggest and most loyal customers - to jump on its cloud.
In a nutshell, this is what sources have told us about Microsoft's Azure numbers:
- Microsoft has generated $1 billion in total worldwide revenue from Azure since 2011.
- Since 2011, more than 3,000 companies had Azure added to their enterprise contracts. However, we've also been told that a large percentage of those 3,000 customers are not using Azure at all, or have dabbled with it and then ignored it.
- Since 2011, across the US only, 70% of US Azure revenue added to those contracts went unused, meaning that only 30% was actually used ("consumption"). "Less than 20% of our cloud customers account for almost 80% of our revenue," one source told us. "The vast majority of Azure enrollments are under-consuming."
- But in 2014, US consumption vastly improved. Out of just over $70 million collected in the US as Azure revenue on enterprise contracts, companies used $47 million. That means "consumption" last year climbed to 67%, according to our sources.
"We are seeing strong usage of Microsoft Cloud services by businesses of all sizes. Over 60% of all Azure customers use at least one premium service like media streaming or the enterprise mobility suite."
Microsoft has also said is that its commercial cloud business is on track to do $5.5 billion and hit a sixth consecutive quarter of triple-digit revenue growth.
What the numbers mean
There's good news in these numbers. There's no question that more companies are starting to use Azure and all of Microsoft's cloud products.
But Microsoft took a risk to get there. In many cases, salespeople sold Azure by discounting other software and adding the money saved on that software back into the contract as credits to try Azure. Customers had up to a year to spend those credits. Whether the customers spent them or not, Microsoft counted that money as Azure revenue.
But this person was wrong - it isn't channel stuffing.
It's really an ancient way to get a customer to try a new product: give them a trial for little to no extra cost.
The problem arises only if customers don't really use Azure during the trial period. Then, cloud revenue from those companies won't continue, much less increase. And they might move to a competitor's cloud, leaving Microsoft's cloud business to "all come tumbling down like a house of cards," one source warns.
Two reasons why things look better
First, in 2014 the cloud became a big thing in the market overall, with many businesses ready to try it. So more companies were ready to use their Azure credits.
The second, as we previously reported, is that Microsoft has pressured its salesforce hard to get their customers to use the cloud.
Satya Nadella even issued a public warning in his famous long memo to employees last July just before he announced huge layoffs.
"I'm looking to the sales and marketing organizations to showcase our unique value propositions and drive customer usage first and foremost," Nadella told them.
Salespeople feeling the pressure
In 2014, Microsoft told the sales force that they had to "live and die by" cloud consumption numbers, in addition to cloud revenue numbers, a source tells us.
Quotas on cloud sales increased dramatically, in addition to increases in quotas on the other software they sell. One person told us it was common for quotas to be doubled on Azure.
One source summarized the frustration: "Where am I supposed to go get [that extra revenue]? I've already sold all the accounts that have some sort of cloud strategy. How do I get accounts to spend more when they didn't use what they had last year?"
Another source inside the company explained Microsoft's rationale for upping the sales pressure: "Azure is a high-growth product. Microsoft looks annually at quotas and make the appropriate adjustments based on the size of the opportunity and the customer demand."
Those that don't make the Azure number cannot get their full bonus and may be at risk for no bonus at all - no matter how much other stuff they sell, we've been told. Some have a new bonus plan where 25% of their bonus is from sales, 75% from usage, but the usage trumps revenue.
"If I don't hit 100% of my [revenue] numbers and 100% of my consumption numbers, nothing else matters. I get ZERO bonus AND a bad review," one source told us.
An added wrinkle
Microsoft's fiscal year starts in July. Sales folks typically know what their quotas are going to be by September.
This year, Microsoft was supposed to roll out a new automated IT system that lets sales people track their own progress and that system wasn't working for months, several sources told us. Microsoft finally let them use the old system just last week.
"We were expected to 'acknowledge' our plans in September last year, even though we had no idea what our quotas would be. Eventually, we got emails and spreadsheets explaining our numbers, but no self-service automated system until last week," the source said.
Some salespeople are offered the opportunity to take a draw against commissions before they earn them. Most don't take the draw, sources tell us. But we understand that among people that did, between the pressure on consumption and not fully knowing their quota, some of them are underwater.
If they don't sell more cloud and hit the consumption requirement, they could owe Microsoft money if they leave.
A source summed up the feeling that we're hearing from lots of people: "I'm not down on cloud. I'm a huge advocate. I love selling it, especially to customers who 'get it.' I just hate getting penalized for selling it to customers who don't."
But the upshot is, it looks like the pressure is working.