with Rita Xia

On November 2 in Shanghai, Microsoft announced the availability of Office 365 and Windows Azure services for customers in mainland China; both have been available in Hong Kong for several years. Through its collaboration with 21Vianet Group and HiSoft (now part of PactEra, a merger of HiSoft and VanceInfo), Microsoft is the first multinational vendor to provide public cloud services in mainland China delivered through onshore cloud infrastructure.

Under the agreement, Microsoft has authorized 21Vianet Group, which has a “value-added telecommunications service” license, to operate Office 365 and Windows Azure in China. This is critical to Microsoft’s overall strategy in China, as only Chinese companies qualify for this government license, which is normally issued by ministry or provincial bureaus of MIIT (the Ministry of Industry and Information Technology). Under the terms of the agreement, Microsoft is sharing cloud services revenue with 21Vianet Group and in exchange is able to leverage 21Vianet Group’s license to operate cloud data centers in China.

Microsoft’s entrance into the public cloud services market in China will affect both local and multinational cloud services/technology vendors in a number of ways:

  • Government regulations restricting multinational companies from offering public cloud services in China are gradually loosening. We expect other multinational cloud providers to follow Microsoft’s approach of partnering with a local service provider that has the “value-added telecommunications services” license. The government’s primary objective with this license is to protect local providers and stimulate onshore cloud infrastructure investments, and this goal is met through partnerships like this.
  • The availability of Windows Azure via onshore data centers enables global cloud service providers to more easily extend services into mainland China. Cloud vendors leveraging Windows Azure as a platform for delivering services such as hosted contact centers and online meeting services will benefit from more consistent connectivity — enabling the delivery of a consistent user experience to customers inside and outside China. This has traditionally been a challenge for vendors like Citrix (with its Go-To-Meeting offerings), as all cloud infrastructure was located outside China, creating issues with connectivity and latency.
  • Domestic cloud services demand, including g-cloud initiatives, will drive further investments. Cloud computing is a significant part of the Chinese government’s Twelfth Five-Year Plan, and the investment in cloud computing is increasing in more than 20 cities, including Shanghai, Beijing, Shenzhen, Hangzhou, Chengdu, Chongqing, Wuxi, and Wuhan. However, g-cloud initiatives in China currently lack adequate onshore cloud infrastructure capacity and local cloud service availability, both of which can be addressed by multinationals with access to the mainland market. In this case, Microsoft working with the Shanghai government provides an early example of the types of engagement between global providers and g-cloud sponsors that we expect to see more of in 2013.

China remains a challenging market for Microsoft. More details can be found in Bryan Wang’s blog. As an early entrant in the domestic cloud services market, Microsoft is well positioned to grow business in mainland China while also strengthening links with various Chinese government agencies.