Published on October 6, 2022
Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.Let’s just start with a quick introduction about yourself, your strategy, your fund and then, more specifically, about your relationship around the area, whether you own any assets, why, for how long and what you are looking at.Analyst 1: I run an investment firm focused specifically on software. The strategy is long only, software only, which is a little bit bold. There are fairly long holding periods of three to five year horizons; I don’t do quarters or anything like that. Analyst 2: I manage money for myself and my family. The family originally has a retail background and I am managing some of the money that has come out of the retail business. In terms of investment style, very long term, quite concentrated and focused on highest quality companies that can become very large. Due to that, and the characteristics, I have got into software and these types of businesses; tech companies if you will.The retail background of my family has led me to Amazon. I have been following the company for the past eight to 10 years. That is how I got into software infrastructure in the first place because I saw that the AWS piece was quite interesting and I’m looking forward to chatting about it today.Analyst 3: We both work for a family office. We are generalists; we run a very concentrated strategy, mostly on consumer and TMT, for a three to five year horizon. We also don’t do quarters. We are investors in all three of the big hyperscale providers. It is an important position to us. We’ve been digging in for a while now and are looking forward to the discussion.As I said, I have a broad agenda here. I thought a good place to kick off, just based on some of the work I have been doing over the last few weeks, is really trying to understand the market share dynamics, mainly between Azure and AWS, over the next five or six years. I don’t know how you all think about that, but I would be interested if there is anything specific around which type of workloads are already shifted into the cloud, versus what type of existing workloads need to come into the cloud and whether that determines who is best to win that market share. For example, could Microsoft have a real advantage here in winning that on-premise piece that is still yet to come over from those more legacy companies that will shift to the cloud?Analyst 1: I think the answer is, obviously, Microsoft is the best-positioned cloud provider here. Just in terms of incremental growth, we see their incremental market share being relatively high. They are the only one that is outgrowing the market significantly. I think the answer is, yes; the type of workloads that are coming over tend to favor Microsoft. They are the entrenched enterprise provider in a lot of legacy enterprises and those tend to be the ones that are slower to the cloud, as well. What has been interesting is how poorly Google is doing. We think that they are probably more leveraged to higher growth areas of the economy but, actually, that is far outweighed by the fact of Microsoft just being entrenched in these enterprises that are the slowest to move to the cloud.Why do you think Google is struggling so much?Analyst 1: I don’t think they are a good sales company. My framework for software, overall, is that it’s a product that is sold not bought and sales outweighs product, in every sense of the word. That is slowly changing, but Microsoft is the great sales company of our time and Google is not, for whatever reason. One interesting snippet I heard, about three years ago, from a partner that illustrates this is that he said, we were doing this big offer with this New York City based bank. They put together an RFP, got ready to go to the cloud and then they asked all three of the hyperscalers to bring people in. Azure had them in their office that afternoon, with a team of 10 people. AWS put together this really strong team and flew out people from all over the country to be in their offices the next day. The Google rep said, I can get back to you in about a week. I’m sure that’s changed, but it’s very much the culture that, I think, Thomas Kurian took over.Just going back to this comment on Azure, how do you look at market share and between Azure and AWS five years out, given Windows’ and Microsoft’s entrenched position?I expect they will be closer to equal than not, five years out. That is what I’m modeling but it’s TBD. I think AWS still has enormous advantages across the board, primarily in how entrenched it is among users and how much of the workforce has been trained on AWS. Theoretically, it’s the best product too; I don’t totally discount that. I think it’s closer to even; that’s what a lot of the CIO surveys out of the big banks say. To be fair, those surveys are heavily weighted towards large legacy enterprise CIOs, so you don’t necessarily reflect the type of CIOs that are AWS first, GCP first. I think the Morgan Stanley survey is always wildly over-bullish on Azure but, with that said, I think that does reflect the reality of workloads.Analyst 2: There is one thing that I constantly ask myself in that regard and that is, why do Microsoft and Google do not disclose their Infrastructure as a Service piece, if their business is so good? Why don’t they disclose the revenues and the margins of that piece? That is a question that has been with me for the past two or three years and I can’t really answer it. I just wanted to throw it out.