Microsoft is being forced to rely on third-party vendors to supply hardware for its own cloud services, a strategy that has allowed the company to expand its software business even more than competitors like Amazon.com Inc. and Google Inc. Microsoft is now building its own virtual-reality and augmented-reality apps on the cloud, but it’s only getting by with its own hardware.
Microsoft has been able to keep its own Windows-based business afloat, even as it tries to keep it leaner and smarter.
Microsoft’s software-and-services division, the company’s biggest revenue source, accounts for roughly 70% of the company.
Its operating-system business, however, has grown to $7.6 billion in revenue in fiscal 2016.
“The cloud is becoming the backbone of Microsoft’s future, and we have a real opportunity to grow it,” said John Smedley, a former top executive at Microsoft who has joined the venture capital firm Sequoia Capital, which is helping Microsoft raise funds.
“We have to make sure that we get this right, and it’s not just about our cloud-based products.
We have to be smart about where our revenues are going.”
That means Microsoft’s cloud services have become more complex than the hardware on which they were originally built.
Microsoft started using the term “cloud” in 2011 to refer to the company-owned, enterprise-grade infrastructure that powers the company and provides cloud computing and other services.
Microsoft now sells hardware that runs on its own, as well as some of its software that is sold through its cloud services.
Those are now considered part of the cloud business.
But Microsoft’s revenue from the cloud grew more than fivefold from $2.9 billion in fiscal 2012 to $18.9 million in fiscal 2019, according to data compiled by Thomson Reuters.
Microsoft says it is getting by on $6.2 billion in cloud revenue in 2019.
But its hardware revenue grew nearly threefold to $14.4 billion, making up nearly a third of its overall business.
The company has also been struggling to compete with Google’s cloud business, which has more than tripled in size in the past decade.
Google has grown by more than 100% in revenue to $2 trillion since 2012.
Microsoft, too, has been struggling, though its business has grown at a slower rate.
Its hardware revenue increased only 5% to $1.6 trillion, according in data compiled for Reuters by the research firm Gartner.
In fiscal 2019 Microsoft’s hardware revenue rose by 5% and software by 6%.
But that growth was offset by declines in both the company as a whole and in the business it built.
The business grew by 6% to almost $1 trillion in the first half of the year, while its software revenue dropped by 16%.
Microsoft’s share of the market for cloud computing services fell to 29% in fiscal 2018, from 37% in the year before.
Microsoft will have to figure out how to get by without that revenue growth.
Sales of the Windows-powered HoloLens augmented- and virtual- reality headset grew in the months before it was released last year.
The device is still in development, but Microsoft is targeting a late-2019 release.
But as Microsoft’s chief executive, Satya Nadella, and his team have struggled to figure it out, the devices have continued to be the most popular on the market.
Nadell said last week that the company had sold more HoloLens headsets in the fourth quarter than it did the first two quarters of the decade.
He didn’t say how many devices it had sold, though some of those devices are sold through Microsoft’s partners.
“You can’t get much more comfortable with a HoloLens than you are with a real device,” said Tim Cook, the Apple Inc. chief executive.
“I don’t think it’s a big deal that Microsoft’s doing well, because if you were in the market right now you’d probably have the HoloLens in your house.”
Microsoft is trying to move away from a reliance on hardware to create cloud services and away from relying on cloud services to build its own products.
It will be looking to expand those products in the coming months and years as it works to move beyond the Windows business and build a broader ecosystem of products that can be used across devices.
The shift to software and services also is expected to have an impact on how Microsoft handles its Windows 10 operating system, which launched in March.
It was supposed to help drive the company back into the cloud.
But many analysts say the company needs a new operating system to compete effectively with Amazon and Google.
The Windows 10 rollout has been slow, and the company has struggled to find an operating system that can match Apple’s iOS, which debuted in 2013.
That could force the company toward a shift toward software, said David Guggenheim, an analyst at the research group Guggin & Miller.