Why This Small Cloud Company Is Still Partnering With Rival Microsoft

October 3, 2016, 2:33 PM UTC
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In the modern tech era, there are still just a handful of massive public cloud providers—namely Amazon, Microsoft, and Google—that offer an array of computing, storage,and networking services. Yet, there are many more smaller companies that offer services meant to augment and even compete with those services.

What’s interesting is how many of those smaller companies could end up being crushed by them.

The latest example: Egnyte, a company that touts hybrid cloud storage software, will now recommend Microsoft Azure as its “premiere storage option” for new customers. This hybrid cloud IT model lets companies keep some data on their own data center servers while storing other information on a shared public cloud infrastructure.

Given that Microsoft touts Azure (plus the upcoming Azure Stack) as the best hybrid cloud option and also offers OneDrive storage to customers, Azure is an intimidating competitor for Egnyte. Then there are other storage-and-collaboration rivals, such as Dropbox and Box (BOX). Suffice to say, this is a very crowded market.

Egnyte is not alone in this need to collaborate with a big cloud or two. Nasuni, Commvault, and other companies offering storage-related products that compete with Microsoft (MSFT) also work with the software giant. Microsoft bought StorSimple, a Nasuni rival, a few years ago.

Egnyte chief executive Vineet Jain tells Fortune that his company entered into a Microsoft partnership with eyes wide open—even though he knows Microsoft is a “frenemy.”

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“Microsoft competes with us now with OneDrive, but the advantage of partnering with them in Azure is that gives us more data center reach worldwide,” he says.

That’s important because data sovereignty laws around the world—particularly in Germany, Switzerland, and France—mandate that tech providers keep citizen data stored in the country of origin. Microsoft has the resources to field multiple data centers in different countries. Egnyte cannot compete with that. But by using Azure, it can accommodate customers in Germany, for example, by using one of two new Microsoft German data centers to keep that customer data local.

The longer-term threat is that when Microsoft makes Azure Stack available next year, customers will be able to run Azure storage internally as well as in the public cloud. That puts it on a collision course with the Egynte-sized providers of the cloud world. Furthermore, it’s interesting that Egnyte has blessed Azure over the Google Cloud Platform given that Google (GOOG) is an investor and Egnyte integrates with Google Apps.

Pivotal, which offers software that runs atop various cloud infrastructure from Amazon, Microsoft and Google, is also a nominal competitor to Microsoft, because it facilitates hybrid cloud deployment with or without Azure, is also an Azure booster.

“We are working on over 150 joint enterprise opportunities right now with the Azure team, and have recently been public with large join customers like Manulife/John Hancock,” John Janke, vice president of the Microsoft alliance for Pivotal said via email.

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Jain said he thinks he can win enough new business through this Microsoft relationship to make the risk worthwhile. Egnyte has about $62.5 million in venture funding and expects to be break-even in terms of cash-flow within months. Given that, the next step would be either to raise $25 million in additional funds or find relationships that will pay off in customer adoption, Jain tells Fortune.

Microsoft claims huge growth for Azure, but it’s still a distant No. 2 in public cloud to Amazon Web Services (AMZN), which pioneered this market starting 10 years ago. But, unlike Azure, AWS doesn’t suit hybrid cloud implementation. The wild card there is that many followers expect AWS to come up with a better hybrid story—perhaps as soon as next week when AWS chief Andy Jassy will host a press conference in San Francisco. AWS does have existing backup and storage partnerships with NetApp, Avere, Commvault, Panzura and others as well.

Still the perception as of now is that AWS is all about data flowing to AWS. “The prevailing wisdom at AWS is that all data will go to AWS,” Jain says. Clearly, that model does not interest him.

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