IDG: At the 2010 Hosting Summit you used a reference to cloud being like rock climbing. It's exciting and scary at the same time. What scares you about the cloud?
Muglia: The thing that's interesting about the cloud is you're running everything yourself. We are responsible for what our customers are experiencing. If we have a problem, it's a problem that's visible to our customers. We have to make sure we are world-class. We need to continue to improve every day. Anybody who runs an operations system has some moments anywhere from concern to terror. That's one thing.
But the reference I made at the time was really to the hosting partners about how the business model is transitioning here and how Microsoft has decided to jump in with both feet and embrace the change. That change will affect the partner ecosystem as well and certainly affects our hosting partners. I was encouraging them to embrace it and to drive their business forward, because it is where the future is going. We've embraced the future and are driving it forward.
IDG: So, from a business perspective, how do you smoothly make the transition from the big upgrade cycles, the big surges of revenue, to the subscription model?
Muglia: The first thing to realize is that we don't really see that surge of revenue at the time of an upgrade anymore because the majority of our customers are buying on multiyear annuities anyway. We have to provide incentives for our customers to upgrade. One of the great things about the cloud is that it's a good business for us because it's a continuation of that annuity cycle. We're very confident that the cloud will drive down the cost of [customer] operations substantially and thus enable our customers to save money and, at the same time, actually be able to build a good business for ourselves.
IDG: Talk about the Azure appliance. What's the goal with that and what has the uptake been?
Muglia: I've got to back up to Windows Azure before I talk about the Azure appliance. What is the benefit that we can see for moving to a cloud environment? We learned this ourselves as we deployed consumer services. Our initial consumer services, our initial MSN services, were deployed largely the same way that any enterprise would build an internal application. They used standard servers, standard operational practices. As we built a large number of these services and they started scaling at large numbers, the cost of operations associated with that just got out of whack for us. It wasn't a sustainable business model.