For storing data in Windows Azure, there are three main options:
Azure storage
SQL Azure
Other external storage mechanisms accessible over HTTP
So, what's the difference?
Azure storage is very fast and intended for storing files or data with a simple structure, and it is also cheaper than its SQL counterpart. In contrast, SQL Azure is better suited to working with complex data relationships and should be an easier option for application migration but is slower and more expensive. SQL Azure is built on top of SQL Server but has a few important limitations, most notably a 10GB size limit. SQL Azure also has a reduced set of functionality to normal SQL Server (although if you are using only the basic/standard features of SQL Server, then your application will probably run fine on SQL Azure). Note that initially SQL Azure (formally SQL Data Services) was similar to Azure table storage, but because of customer feedback, it was changed to a more traditional SQL Server model.
The differences between the two services are summarized here:
Azure storage:
More scalable than SQL Azure
Stores blobs, queues, and entities (a type of .NET object)
Cheaper than SQL Azure
Does not use SQL Server (the development version does, though)
Is not relational and doesn't use SQL
Access is provided by the REST API
SQL Azure
SQL Server you know and love, offering an easier migration path for existing applications
Supports complex relational queries
More expensive than Azure storage
Access is similar to standard SQL Server apart from using an Azure-specific connection string
Before you jump to automatically using SQL Azure, you may want to consider whether a traditional relational database is scalable for high-traffic applications and whether you would be better served using Azure storage.
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