CRN Survey: Microsoft, You Have A Margin Problem4:00 PM EST Fri. Oct. 26, 2012
Microsoft CEO Steve Ballmer has gone to great lengths to characterize Windows 8 as a pivotal moment for Microsoft partners to grow sales exponentially based on a re-imagining of the Windows experience.
But Microsoft is coming up short in terms of Windows 8 profit margin for partners, according to an exclusive CRN survey. In fact, a majority of Microsoft partners polled by CRN are giving the software giant just average marks with regard to the profit margin opportunity for both Windows 8 desktop services and product sales.
Sixty-eight percent of the solution provider respondents rated the Windows 8 desktop services profit opportunity as either average margin or low margin, with 52 percent giving it an average margin rating and 16 percent giving it a low margin opportunity.
In addition, 75 percent of respondents rated the Windows 8 desktop product profit opportunity as an average margin or low margin opportunity, with 53 percent giving it an average margin rating and 22 percent giving it a low margin opportunity rating.
Fifty-eight percent of the partners surveyed also rated the software giant's overall partner profitability as average, below average or least profitable, with 40 percent rating Microsoft as having average profitability compared to other vendors, 15 percent rating Microsoft as below average and 3 percent rating Microsoft as their least profitable vendor partner.
Microsoft's average overall partner profitability ranking and the thin margins around Windows 8 is another sign that Microsoft just doesn't get the changing channel dynamics in the new tablet/mobility era, said a CEO for a national enterprise-focused Microsoft partner.
"They just don't have an engagement model with the partner community. All of their engagement is with LARs [Large Account Resellers], which is purely transactional. It's the partner community driving the solution sales," said the partner, who wished to remain anonymous.
Microsoft has about 15 LARs, among them CDW, Dell, Hewlett-Packard, SoftwareOne and SHI International, that are billed as Microsoft software licensing experts -- advising and managing enterprise software license agreements for customers. Some solution providers complain that it is the LARs that get the lion's share of joint marketing and development funding and resources. They say the LAR model is a problem given the significant sales effort required by partners to drive Windows 8 tablet/mobility solutions into the business market rather than simply advise customers on complex Microsoft enterprise license agreement terms.
"The LAR model worked fine as long as Microsoft had a better mousetrap that everyone wanted to buy," said the executive. "Businesses just aren't going to jump in and get Windows 8 solutions. It's no longer a transactional sale. You have to go out and sell it. This is a new era for Microsoft. The biggest fear I have is that we are not going to have an integrated and viable tablet/mobility platform alternative to Apple in the enterprise. We have to drive [Windows 8] tablet/mobility adoption, and it is not easy to do. The stronger and more entrenched Apple gets with iPad and iPhone, the more difficult it is for enterprise solution providers selling Microsoft mobility."
In an interview with CRN at Microsoft's partner conference in July, Ballmer maintained that Windows 8 represents a huge opportunity for partners to drive explosive sales and profit growth. He also questioned the CRN survey language.
"What I would say is the way you ask the question, you get a certain answer," said Ballmer. "You sort of pointed to margin. Look, if you wanted to do something high margin, do custom app development for a low volume operating system. I am not being pejorative, but that is the highest margin thing you can do.
"I think what we give our partners with Windows 8 -- and you saw that here at the partner conference -- is the ability to help their customers do things that they couldn't do before," said Ballmer "Whether the margin is X percent or Y percent, the real opportunity is to sell X or 2X or 3X or 5X, the ability to galvanize the customer base on new scenarios, new opportunities and really drive overall volume. Yeah, margin will come with it. But I think it is pretty powerful. You know the Windows PC market may grow a little bit, a lot. It is hard to predict how Windows 8 will affect it. But the opportunity for our partners is going to grow a ton. Just think of the new scenarios for people."
Microsoft certainly has some work to do with regard to Windows 8 joint marketing and market development funding awareness for partners, according to the CRN survey. Twenty-two percent of partners surveyed said they did not know or were unsure of Windows joint marketing and market development funding opportunities. Only 18 percent rated the company's Windows 8 joint marketing and market development funding as excellent or very good.
Twenty-nine percent of partners rated Windows 8 joint marketing and market development opportunities as good, 18 percent as average, 5 percent as below average and 8 percent as poor.
Microsoft's grades were somewhat better for Windows 8 partner enablement services: Thirty-three percent of solution providers described them as excellent or very good. Twenty percent of partners rated Windows 8 partner enablement services as good, 17 percent as average, 8 percent as below average, 4 percent as fair and only 1 percent rated it as poor.
"I have account reps and system engineers and none of them care about Windows 8," said one executive for a national Microsoft partner who wished to remain anonymous. "There is no groundswell in the organization around Windows 8. No one is talking about it."
As to how quickly Windows 8 will be adopted, 38 percent of the CRN survey respondents said that less than 10 percent of their customers will adopt the operating system within the first year of its release. In addition, 8 percent of partners expect none of their customers to adopt Windows 8 in the first year.
A report issued last week by research firm Gartner predicted that 90 percent of enterprises would hold off on wide-scale deployment of Windows 8 at least through 2014.
A number of industry analysts expect adoption of Windows 8 to be slower than earlier generations of Windows given that the Windows 8 interface -- designed to support tablets with touch screens as well as desktop PCs -- is such a marked departure from the traditional Windows interface.
But Modern Networks, a London, U.K.-based Microsoft partner, expects 50 percent of its Windows customer base to adopt Windows 8 during the first year of its availability, said Rob Thursfield, business development director and Microsoft alliance manager at the company, also in a pre-Windows 8 launch interview. "A lot of what we do revolves around the Microsoft stack of products, which is critical to us," said Thursfield.
Microsoft has portrayed Windows 8 -- and especially its enhanced features for tablet computers -- as a major opportunity for its thousands of resellers, service partners and ISV developers.
"With Windows 8 we're opening up for our partners a new set of devices and device experiences that [partners] use to sell solutions to their customers," said Erwin Visser, senior director of Microsoft's Windows Business Group that's in charge of marketing the new OS, in an interview. "Windows 8 is great for all PC form factors."
As to where survey respondents feel that the greatest sales growth will come as a result of Windows 8 over the next year, 34 percent anticipate that the greatest sales growth will come from PC sales, 20 percent from Windows 8 software solutions, 16 percent from tablets and 13 percent from migration services.
Microsoft partners see a particularly strong sales opportunity for Microsoft's Surface tablet vs. the Apple iPad, with 64 percent of partners rating Surface as an outstanding or good sales opportunity.
Microsoft, however, doesn't plan to sell the tablet computers through the channel -- only through its own retail stores and website. Partners that want to sell Surface tablets will have to buy them through those venues.
As to how solution providers rate Microsoft's cloud computing opportunities compared to other vendors, 70 percent rated the software giant as the same or not as good as other vendors.
"Microsoft is not strategic to our business," said one solution provider executive who wished to remain anonymous. "VMware and Cisco are strategic. They are changing the way we do business. Microsoft is not."
The survey, conducted by the UBM Channel Research team, was sent to a random sample of the CRN Channel Intelligence Council, and the panelists were pre-screened for their involvement with Microsoft products and/or services. Ninety three solution providers completed the survey, which was conducted in May with a follow-up survey in June.
STEVE BURKE contributed to this story.
PUBLISHED OCT. 29, 2012