via wsj.com 9/14/20

Cloud-computing giants try to hook small companies; ‘If you’re a startup, having a big brother doesn’t hurt’

Microsoft Corp. and Amazon.com Inc. are embracing a new tactic to win the supercharged battle for cloud-computing business, luring fast-growing startups by promising to help sell their services.

Microsoft on Monday announced a partnership with Abnormal Security Corp., under which the San Francisco-based email-security startup will move its software onto the tech giant’s Azure cloud. Microsoft, in return, promises to sell Abnormal’s services to its large enterprise clients, which Microsoft says is its first such arrangement. The companies didn’t disclose financial terms.

Amazon also has used the partnership model to bolster its cloud business. In January, it signed an agreement with Apptio Inc., a Bellevue, Wash.,-based software company that helps users manage their cloud spending. Apptio agreed to expand its use of Amazon Web Services, the online retail giant’s cloud, and Amazon now sells the startup’s services to its cloud customers.

“All these cloud platforms would love startups to build on top of them,” said Matt McIlwain, managing director at Seattle-based venture-capital firm Madrona Venture Group. “What’s new is this intentionality and saying, ‘We’re going to partner.’”

For the two cloud-computing giants those partnership deals could help sustain growth in a business segment that has become crucial to their financial fortunes—and increasingly competitive. The partners can tap the vast sales reach Microsoft and Amazon offer, providing access to a range of customers many startups and small enterprises could struggle to reach independently.

Amazon has a 45% market share in providing the so-called public cloud infrastructure, ahead of Microsoft with almost 18%, according to research firm Gartner Inc., which puts other rivals at below 10%. Amazon said the cloud generated about 12.5% of the company’s total sales last year. Microsoft, which calculates cloud revenue differently, said those sales represented more than 30% of its total turnover.

In the two years since its founding, Abnormal used AWS, spending several million dollars annually on the service. Moving to another provider can be cumbersome and costly. However, Abnormal’s chief executive, Evan Reiser, said that selling its security service to the huge enterprise customers with ties to Microsoft was so attractive it outweighed the downside of making the switch in cloud providers.

Microsoft and Amazon both have seen accelerated adoption of their cloud services during the pandemic, as companies embrace tools for remote work. Usage has driven investor expectations sky high, leaving little room for missteps. Microsoft’s stock has risen more than 30% this year. Amazon’s stock is up more than 70%, driven by the strength of its cloud and online retail sales during the health crisis.

Amazon popularized the cloud model, but Microsoft has stepped up its challenge to win more of the lucrative and fast growing business. The two have been battling fiercely, including over multibillion-dollar government contracts. The Pentagon this month said it was moving ahead with a potentially $10 billion cloud-computing contract with Microsoft after losing bidder Amazon challenged the deal.

Amazon’s early focus on the cloud gave it a jump on winning business from startups. Many of them were early adopters of Amazon’s computing services that allowed them to avoid sinking money into buying their own servers and software. But Amazon also has spooked some tech companies that use its cloud, sometimes launching competing products.

Three years ago, Amazon quietly launched AWS Connections, a program designed to link startups with some of its biggest customers. Since 2019, Amazon said it has arranged around 2,000 meetings between startups and potential customers.

New York-based digital insurance startup Slice Insurance Technologies Inc. used the Amazon program to win businesses from a health-insurance provider operating in Australia, the startup’s CEO Tim Attia said, giving the company exposure overseas. “If you’re a startup, having a big brother doesn’t hurt,” he said of the relationship with Amazon.

For Microsoft, the partnership model is part of a broader push to secure more of that business, which can start small but can become huge. One challenge for Microsoft has been wooing startups that could be leery of the tech giant whose business software can include competing products. Amazon, which doesn’t have those successful software tools, makes it an easier partner, Mr. McIlwain said, whose firm was an early investor in the e-commerce giant.

Microsoft in April appointed Jeff Ma to court startups, and he approached venture-capital firms Greylock Partners, Benchmark and Andreessen Horowitz to try to snare business among their portfolio companies.

Saam Motamedi, a board member at Abnormal and general partner at Greylock Partners that has backed the startup, said Microsoft has been aggressively promoting its Azure cloud to those young businesses. “Microsoft is spending a lot of resources on this,” Mr. Motamedi said.

For Microsoft, the deal with Abnormal is a sign the partnership model works, Mr. Ma said. “We’ll learn from this.”

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