How can customers expect licensing to change in the cloud model?
The biggest change as we move to the cloud model is it's a subscription-based model. It's an ongoing payment structure, because, obviously, you're running the service for the customer. If it is a well-defined service, like messaging or collaboration or CRM, it will typically be a per-user fee of some form that's paid, which is fairly consistent with the way they buy today, although they typically don't buy it by subscription. They buy it as a one-time purchase, but they, again, pay a per-user fee.
For business applications, the cloud model is based on instances or capacity-based, so it's based on the usage of the application. The model changes somewhat. Obviously, one of the implications is that, particularly if you're moving to a public cloud environment, there's a transition from having upfront cap-ex costs associated with purchasing hardware. That is not a software licensing issue, but it's very significant [change] to the customer, to an op-ex and ongoing charge.
But probably the most dramatic change that affects the customer in terms of the costs associated with this has nothing to do with licensing. It really has to do with their overall cost of operations. The promise of the cloud is that by running these things at very high scale, by using software to standardize and deliver a consistent set of services to customers, we can reduce the cost of running that operation very substantially.
We know that the majority of cost in IT is the people cost associated with operations. That's where the cloud really brings the advantages. The main advantage in terms of getting better business value at a lower cost is because the cloud standardizes the way operations is done and really dramatically reduces that.
If you look at most of our customers, they will have a ratio of somewhere between 50 to 100 servers per administrator. A world-class IT shop might get that up to 300, 400 servers per administrator. When we run these cloud services, we run them at 2,000 to 4,000 servers per administrator internally. By running it ourselves, we are also able to really engineer the software to continue to drive out that cost of operations in a way that I don't think the industry's ever seen before.
So, two questions on the shift to that kind of pricing. One, do you think customers are prepared for that? Do they have a good handle on a budget that goes from projects and cyclical upgrades to a subscription flow like that and are they understanding the long-term implications of that shift?
I think they love it. I think they're not just prepared, they're demanding it. This came home to me when I was at a CIO event -- it was large companies, top 100 U.S. companies. It was one of those vendor events where you're kind of getting beat up by about 20 guys. It's like dental work without any Novocain, basically, for an hour. One of the CIOs said to me, 'Bob, you don't get it. We never want another software update from Microsoft again.
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