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Microsoft and Deutsche Telekom's 'German cloud' wafts away

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Dark days ahead. Source: Handelsblatt Global

Back in 2015, it seemed like a great idea. In response to widespread German fears about data security, Microsoft and Deutsche Telekom agreed to collaborate on cloud computing with extra-secure, ring-fenced data, guaranteed to stay in Germany and protected by the country’s extra tight privacy laws.

But the sure-fire winner turned out to be a dead-loss: over-priced, under-performing and unpopular with customers. And Microsoft’s initial investment alone costed the company more than €100 million ($123 million) on “Microsoft Cloud Deutschland” (MCD), Wirtschaftswoche and Handelsblatt have learned. The company is unlikely to recoup this investment.

The failure is all the more annoying for Microsoft, since the German cloud computing market is booming. Microsoft’s other cloud services are selling well, as are products from competitors Amazon Web Services (AWS), SAP and IBM. After many years of suspicion, German customers – above all, German companies – seem to have fewer hesitations about keeping their data in the cloud.

The cloud's extra security turned out to be a real hindrance to doing business.

Three years ago, the atmosphere was very different. Edward Snowden had revealed US government data surveillance, prompting widespread anxiety. The European Court of Justice overturned the Safe Harbor Agreement between the EU and the US, in effect ruling that data storage with American companies was unsafe for Europeans.

“There was a lot of initial interest in cloud computing that year, but after five minutes all the talk was about data security,” says the CEO of a German IT service provider. For an American company like Microsoft, suspicion was all the greater, prompting it to offer a service that would be both safe and “German.”

So why has Microsoft’s bright idea failed so spectacularly? Partly because of faults in the MCD product itself. The data in the “German cloud” was kept in two specially-built data centers, one in eastern Germany and one near Frankfurt – safe from malicious hackers, but also from the prying eyes of the US government.

Unfortunately, extra security turned out to be a real hindrance to doing business. Companies who wanted to establish secure information links to Asian subsidiaries or overseas databases were hit with delays and crashes. Servers went down regularly, system updates were often impossible. And all this for a service which cost 25 percent more than ordinary cloud computing.

The other factor that doomed Microsoft’s German cloud may have been a general shift in attitudes. In place of the touchy paranoia prompted by the Snowden revelations, the mood today seems more pragmatic. “At a certain point, the discussion died down,” recalls one consultant who works in the IT field.

Secure computing remains an important market, particularly in sectors with tough data protection laws. But customers want good service as well as rock-solid security. Competition is tough. Amazon’s AWS now has an entire team to help its customers adhere to the EU’s General Data Protection Regulation, which comes into force in May. IBM has launched the “EU Cloud,” which guarantees data will not leave its German-based servers unless the client explicitly approves.

Aside from the MCD fiasco, Microsoft is doing well from the cloud. Worldwide, its cloud computing division earned $7.8 billion in the second quarter of 2017, and this year’s revenues look set to break the $20 billion mark. Global spending on cloud services and infrastructure will reach $160 billion in 2018, up 23.2% on last year, according to market research firm IDC.

“Microsoft pushed its 'German cloud' very heavily, and that helped develop the entire market.”

Axel Oppermann, founder and CEO, IT consultants Avispador

In Germany, Microsoft lies quite a bit behind Amazon, the market leader, but is expanding its data capacity. Microsoft is planning two new German data centers, at a cost of at least €100 million, Handelsblatt learned from company sources.

The overall outlook for cloud computing in the country is mixed. The well-regarded BSA Global Cloud Computing Scorecard ranks the country first for cloud computing, based on a range of criteria including physical infrastructure and legal protections. And data center capacity has seen double-digit growth, but its global market share has fallen, thanks to increased capacities elsewhere in the world.

Ironically, although Microsoft Cloud Deutschland turned out to be a white elephant, its widespread publicity may have driven sales of other cloud computing products. “Microsoft pushed its ‘German cloud’ very heavily, and that actually helped develop the entire market,” says Axel Oppermann, founder and CEO of IT consultants Avispador.

Christof Kerkmann is an editor for Handelsblatt and writes about the technology sector. To contact the author: kerkmann@handelsblatt.com

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