ITP Techblog

Microsoft's move to open a data centre in the North Island, probably Auckland, sometime next year will shake up the local cloud computing industry and overcome lingering data sovereignty issues around sending government data to Australia.

It is the first of the big three cloud providers, Amazon, Microsoft and Google, to commit to developing local infrastructure, which could require an investment on the part of the Redmond giant north of $100 million.

For Microsoft, this makes perfect sense. It is doubling down on its cloud computing strategy which has buoyed the company's fortunes under the leadership of CEO Satya Nadella. Microsoft's Azure cloud computing platform is the number two international player in cloud computing, according to analyst group Canalys, which estimated it accounting for around 17 per cent of the cloud computing market late last year.

That was up a couple of per cent on the previous year and at the expense of leading cloud player Amazon Web Services, which has 33 per cent of the market. Google, with 7 per cent, is also starting to make inroads against Amazon.

Microsoft has this year already announced new "cloud regions" in Israel, Mexico, Poland and Qatar, bringing to nearly 60 the number of regions in operation or development. While AWS is a competitively-priced and reliable choice for companies big and small that want flexible hosting arrangements, Microsoft's strength is the breadth of its offerings, which not only span the Azure cloud platform and its AI and data analytics tools but Office 365 and the Dynamics software suite. Many large companies that are in the process of shifting their applications to the cloud are also big users of Microsoft products, so it often makes sense to migrate everything to Azure.

While this has been a long time coming, it also makes a lot more sense when you browse Microsoft's accounts for the year to June 30, 2019. It shows Microsoft generated revenue in New Zealand of $463 million that year. That was up from $184 million the previous year.

Did Microsoft suddenly more than double its business here in the course of a year? No. This is most likely related to Microsoft restructuring how it accounts for revenue from its New Zealand operations, as a result of a $24.7 million tax settlement with the IRD. Here's hoping other tech giants like Google and Facebook, that currently book a lot of New Zealand revenue in other countries where they enjoy a lower tax rate, go through a similar process with their accounts.

So the bottom line is that Microsoft does major business in New Zealand, including with government departments and major corporates, so the investment is certainly warranted. It also gets around the tricky issues with data sovereignty that government departments face when considering hosting arrangements with the big cloud providers.

That currently involves sending data offshore to data centres, generally in Sydney and Canberra. Technically, that works fine, but storing public data offshore makes it subject to other country's laws which is problematic, as Parliamentary Services discovered when it had to pause implementation of Office 365. It realised New Zealand data could be subject to a new law across the Tasman that can force tech companies to provide law enforcement and security agencies access to encrypted communications.

What does it mean for us?

Being able to put the data on Microsoft servers here eliminates that problem for government and corporates sensitive to the same issue and will give assurances to Māori, who are seeking to preserve the sovereignty of their data for cultural reasons. A lot of iwi organisations and businesses in the Māori economy will consider Azure as a hosting option for the first time as a result of that.

It also represents a major boost in our digital infrastructure, which is why everyone all the way up to the Prime Minister was crowing about the news yesterday. We are finally on the map for the big tech players, this is seen as an endorsement of our growing maturity and impact in digital business.

Microsoft said as much yesterday when it touted the Fletcher School's Digital Evolution Index which characterises New Zealand as a 'standout nation' "demonstrating to the world what the future might look like," as Microsoft put it.

It will generate some jobs and increase the likelihood of useful partnerships that leverage Microsoft's powerful AI and machine learning tools.

But for companies such as Revera, owned by Spark and Datacom, the country's largest IT company with several data centres in operation, the news will be less enthusiastically received. They have for years been the go-to hosting providers for many companies in the absence of the big players having a physical hosting presence here.

Datacom does a lot of business taking clients to both the Microsoft and AWS clouds and that is unlikely to change. But the economics of local hosting companies' cloud businesses will be challenged by Microsoft's arrival, barring some sort of partnership with them. With its own shiny new data centre, Microsoft will be more inclined to put more customers on its own infrastructure, meaning less margin and ongoing revenue for local data hosts and integrators.

They will have to adapt to the new environment from next year when the Microsoft data centre is likely to be operational. What we want at the end of this is a thriving ecosystem of local players and international cloud hosts here so that New Zealand companies have a choice as to where they park their data and applications.

The economies of scale increasingly favour the big three and Microsoft is still the productivity software provider of choice. The last thing we want is competitors falling away unable to compete with the big three. That's a risk, but for the time being, the pros of this move would seem to far outweigh the cons and the huge growth in cloud services means there is plenty of business to go around, including for innovative smaller players.