Why Connected Cars Are a Big Deal for Microsoft Corporation's Cloud Business

By Harsh Chauhan Markets Fool.com

Microsoft (NASDAQ: MSFT) is making a big move in the automotive space without making any cars of its own. The Redmond, Wash. company has decided that it won't be joining the race to develop its own cars, like many of its peers. Instead, Microsoft wants to become the racetrack itself.

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Microsoft's automotive move

At CES 2017, Microsoft announced the launch of the Connected Vehicle Platform based on Azure in a bid to become the cornerstone of the connected and automated car revolution. This platform will focus on five key things the cars of tomorrow need -- advanced navigation, predictive maintenance, better in-car productivity, customer inputs, and finally, enabling autonomous driving.

Image source: Microsoft.

According to a blog post by Microsoft Executive VP of BusinessDevelopment Peggy Johnson:

Microsoft's cloud will do the heavy lifting by ingesting huge volumes of sensor and usage data from connected vehicles, and then helping automakers apply that data in powerful ways.

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Microsoft, therefore, is taking the smart approach of becoming the enabler of connected and automated cars. Such an approach avoids the need for delivering any sort of packaged product to automakers. The connected vehicle platform will use artificial intelligence (AI) based on data provided by vehicles and drivers in real time.

In fact, the company has been shoring up its AI capabilities in order to develop its automotive platform. Last month, it announced the acquisition of Canadian AI company Maluuba for an undisclosed amount. Maluuba uses deep learning and neural networks to create independent machines that can "think, reason, and communicate like humans." Microsoft can use these traits to enhance the data processing and decision-making capabilities of its own technology.

Additionally, Microsoft will power the in-car productivity of cars by equipping automakers with its key products, such as Office 365, Cortana, and Skype for Business. This focus on offering a cloud platform with advanced computing and productivity to automotive clients should help it win a lot of business in this space.

The opportunity in automotive data processing and storage

Computer software provider Tuxera believes a new car in 2017 will generate 20 GB of data daily if it is driven for just two hours. This amount of data will come from just 16 sensors and two cameras, and these cars are far from being fully autonomous. By comparison, future cars with enhanced self-driving capabilities are expected to have at least 20 computers on board to process the data captured by cameras.

In fact, an autonomous vehicle is expected to generate 10 GB of data each second, which will increase as more sensors are added.This presents the need for a centralized infrastructure to share the processing workload. This way, the vehicle can collect data and prioritize actions that have to be executed in real time and upload the rest to a data center for further processing and analysis.

Microsoft wants to become this data center with its connected vehicle platform. The company has even equipped the Azure cloud platform with NVIDIA's Quadro professional graphics card. As a result, Azure can now offer supercomputing-class performance to its customers for high-performance applications, indicating that it is prepared to process the huge amount of data connected cars will generate.

What connected cars mean for Microsoft's business

Microsoft is on the right track as it has already won contracts with key automakers. The Renault-Nissan alliance is one of the first adopters of the connected vehicle platform as it plans to put 10 autonomous cars on the roads by 2020 using Microsoft's cloud.

Investors should also note that car makers aren't the only ones utilizing the Azure connected cloud platform. Reinsurance provider Swiss Re, for example, is exploring the use of the Azure cloud to collect and analyze telematics data to create specific insurance packages for customers based on driving behavior.Similarly, geographical information system provider Esri has also signed up to use the Azure cloud to provide analytics and data to the driver of a car.

A growing, diversified client base can boost the company's cloud business in the long run, which is already growing at a faster-than-expected pace. When Microsoft released its second quarter results, its cloud revenue grew 10% year over year to $6.9 billion, outperforming analyst expectations.

The company's cloud growth was driven by a 93% jump in revenue from Azure as Microsoft saw the platform's usage by clients double on a year-over-year basis. An increase in the adoption of Microsoft's connected vehicle services over time will lead to wins for the Azure platform as data needs inevitably grow.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fools Board of Directors. LinkedIn is owned by Microsoft. Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool has a disclosure policy.