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How can Microsoft ever compete with Amazon?

But Microsoft and other more traditional software companies may struggle with an even more fundamental issue as they move to supplement their standard offerings with software-as-a-service and cloud development platforms.

Ozzie hinted at it with his acknowledgment of Amazon’s success to date. Sridhar Vembu, CEO of AdventNet, the company that created the Zoho suite of online productivity applications, highlights it in a smart blog post.

Amazon is a giant in a business with notoriously slim profit margins, which is likely part of the reason it was so quick to recognize and capitalize on the cloud computing opportunity. Its retail business models are designed around obtaining the maximum amount of efficiency from its operations.

That’s not the case with traditional software suppliers. Companies like Microsoft aren’t particularly eager to make huge infrastructure investments to support what could end up being a low-margin business — especially when at least some of its customers will likely be those who migrate from its own higher-margin on-premise products. Writes Vembu:

… it is hard to see how the economics would work for [Microsoft] against Amazon. It is very hard for companies to go down the value chain for growth, so I am skeptical Microsoft would easily accept Amazon-like margins. On the other hand, for Amazon, cloud services have to deliver only a little higher margin than retail to be well worth the investment. That is not a tough hurdle, because retail is one of the toughest businesses out there


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