Microsoft is about to bite the hands that feed it

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I was just settling in for a busy day at the office when I saw the incoming call from the Undercover CISO.

“Hi UC, have any fun hacks lately?”

I braced for his normal abrasive and surly tone, but he seemed almost despondent.

“It’s over. They have turned on us. It’s only a matter of time now.”

“What do you mean? Who has turned on you?”

“We’re done.”

He was distraught. This was totally out of character for the UC. I tried to snap him out of it.

“What happened??? Who is after you?”

“The death star. Didn’t you hear about the Microsoft security experts program?”

Of course I had. Microsoft had billed it as “building a safer world together with our partners.” As their description states:

This comprehensive, expert-led service combines proactive threat hunting and managed XDR, leveraging Microsoft’s complete security information and event management (SIEM) and XDR stack to protect all cloud environments and all platforms. Dedicated Microsoft security experts manage onboarding, daily interactions, practice modernization, and incident response for you. Microsoft Security Services for Enterprise is sold through a custom statement of work and is available today.

Seems like a good deal for Microsoft’s partners on the surface, but let’s dig into the economics.

Microsoft has recently been touting its cybersecurity business. Microsoft’s CEO, Satya Nadella, revealed that his company had $10 billion in cybersecurity revenues in 2021 and it was up more than 40% on the year.

By letting investors in on the enormity of Microsoft’s security business, Nadella was casually uncovering a powerful growth engine. Total revenue across the company was up just 14% from the prior year. And by way of comparison, Palo Alto Networks, one of the largest pure-play security software companies, delivered 21% revenue growth over roughly the same period, on a base smaller than $4 billion

Why is this important? To keep its stock premium, Microsoft must grow earnings at around 20% per year. With revenues at around $200B per quarter that is a lot of earnings they must generate through acquisitions, organic growth, or…gaining market share. And that’s where the security experts group comes in.

The managed security services market is big and growing, but highly fragmented. It is expected to reach $65 billion by 2026. There are hundreds of players and a there is a lot of price competition. You can’t even try to compete without heavy offshoring. Not a business Microsoft wants to get into. But, many companies will run to partner with Microsoft for this initiative. It creates instant credibility for up-and-comers. Sounds like a win-win on the surface. But no so fast…

According to the UC, The current plan is that the “security experts” will use Microsoft security tools on the Microsoft Azure platform. They cannot bring their own intellectual property, tools, or platforms to bear. Is this to keep the service scalable and able to be monitored for quality? To a point, perhaps. But there is another twist. Microsoft will mine the data – alerts, investigations, and analyst activities. Why would they do that? Because they can get a treasure trove of data for their own machine learning algorithms. No matter how much offshoring you do, a machine is always going to be less expensive. And once Microsoft can mine the data for hundreds of customers and thousands of “security experts”, the partners can be seamlessly replaced by what we used to call “expert systems.” If you own the platform, you own the data. And the data is where the competitive advantage is.

After I did my research I ran my thoughts by the UC.

“Hey UC, I see your concern. Microsoft seems to have a long term plan to bite the hands that feed it.”

He shot back, “No, they are slowly gnawing off the arms of the hands that feed it, without anyone noticing!” At least he was getting back to his usual feisty self. “Microsoft is the master at staying under the regulatory radar!”

“Well UC, this is going to be bad news for their competitors, don’t you think?”

He let out a hyena-like laugh. I was suspecting he had gone mad.

“Yes! It is bad news!! I have to double down on shorting my security stocks! Yes!!!” He was ecstatic as he hung up the phone.

You have to hand it to Microsoft. They have used their oligopoly power in the cloud to quietly vertically integrate as the security space leader. And unlike the other big tech companies, have mostly done so without a lot of regulatory scrutiny. It will be interesting to see how this plays out in the market, but for now, Microsoft is the alpha wolf of the security pack.

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