Walgreens and Microsoft are taking on Amazon (AMZN, MSFT)

Walgreens inked a seven-year deal with Microsoft that encompasses a range of healthcare initiatives as both companies grapple with Amazon's looming presence in healthcare. In addition to Walgreens moving its IT infrastructure over to Microsoft Azure Microsoft's cloud computing service the duo will also collaborate on new in-store healthcare services, virtual care offerings, and joint innovation centers.

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The deal comes as Amazons wide-ranging moves into the healthcare sector send shudders throughout the industry, forcing incumbents like Walgreens to find ways to insulate their core businesses against Amazons impact.

Pairing up should help Microsoft and Walgreens stave off Amazon's growing healthcare footprint:

Walgreens can shore up against Amazon's threat to its pharmacy business with Microsoft-supported health services.In a company filing, Walgreens listed Amazon's PillPack acquisition as a risk factor and threat to its prescription drug sales and identified turning its stores into convenient healthcare hubs as a way to stay abreast of changing market dynamics. If Microsofts tech helps Walgreens deploy in-store and virtual care services that drive foot traffic to its retail locations, it could deaden any potential blow Amazon delivers to its pharmacy revenue.
Signing Walgreens onto Azure could combat Amazon from encroaching too far into Microsofts healthcare cloud market share.Both Microsoft and Amazon are building out their portfolios of healthcare cloud tools, setting up for a showdown as the two look to attract more healthcare clients. Microsoft could use its partnership with Walgreens to form more relationships with providers, as Walgreens already partners with health systems and hospitals.

Further, Amazon's threat of poaching healthcare clients from Microsoft has paradoxically helped the firm land more deals with major retailers. While Amazons foray into healthcare threatens to bleed into Microsofts cloud market share, its also created demand for Microsofts services from fellow Amazon competitors. For example, Microsofts also landed contracts with Walmart and Kroger since Amazons PillPack acquisition.

Like Walgreens, both Walmart and Kroger have pharmacy businesses that risk a substantial drop in revenue when Amazons inevitably scales up its pharmacy business to its e-commerce site or to Whole Foods locations, and the retailers are likely leaning on Microsoft's health tech to help minimize the number of customers who might migrate to an Amazon-run service.