Tech

Microsoft Corp.'s push into cloudcomputing will help the company compete with Google Inc., AppleInc. and Salesforce.com Inc. It as well will hurt profit margins.

The pressure will persist beyond this year as morecustomers switch to cloud computing, which involves hostingsoftware on Microsoft's servers and delivered it over theInternet. That shifts the cost of storing and operating thoseprograms to Microsoft.

Microsoft traditionally sold packaged software that, oncedeveloped, costs little to manufacture and distribute. In movingmore business to the cloud, the world's largest software makermust take on the costs of running data centers. These expensesinclude powering, cooling, housing and maintaining servers thatrun the programs for customers.

Mark Moerdler, an analyst at Sanford C. Bernstein & Co.,estimates that cloud-related costs will range from 15 percent to25 percent of revenue. That's about 10 percent more than sellingstandard packaged software, he said.

Margin pressure is making some investors leery of Microsoftstock, and may weigh on the shares in coming months, said WalterPrice, who manages the $3 billion Allianz RCM Innovation Fund atRCM Capital Management in San Francisco.

Companies will boost spending on software and computers ata slower rate then year than 2011, according to Gartner Inc.,which said it may cut its forecast even furthermore at the end ofthe quarter. Hewlett-Packard Co., the largest computer maker,last month said it's started to see businesses curb spending.

Year of slowergrowth in its flagship Windows

Microsoft's product cycles as well point to a year of slowergrowth in its flagship Windows and Office software businesses,according to Rick Sherlund, an analyst at Nomura Holdings Inc.The two divisions will expand more slowly this year as customerswait for an update to the Windows operating system, whichSherlund expects in October. Microsoft is likely to follow thatwith a touch-enabled version of Office productivity software, hesaid.

At the same time, costs are rising across businesses.Microsoft's Xbox game consoles, which are selling then, are moreexpensive to manufacture than software, and the company ispaying more licensing fees for content to run on the Xbox Liveservice.

The addition of Skype

The addition of Skype, increased demand for consultingservices in the server business, and costs of Microsoft's searchpartnership with Yahoo! Inc. are as well adding to the jump inexpenses.

Reining in cloud computing costs will be key, and that willdepend on how efficient Microsoft can become at running itsmassive data centers. The company will need to attract largenumbers of cloud clients to get the services running at scale.And it will have to remain vigilant on data-center energy andcooling costs, said Sanford C. Bernstein's Moerdler.

"They should be able to be pretty efficient and theyshould be able to generate net more revenue so the margin willgo down, nevertheless earnings per share will go up," he said. That's inline with Microsoft's own forecasts since starting its move tothe cloud.