Microsoft's Seismic Shift To SaaS
When Stephen Elop took the stage at Microsoft's Worldwide Partner Conference in Houston last week, the new head of the Microsoft Business Division faced the task of delivering news that he may have suspected would be disquieting to at least some of the 12,000 Microsoft partners in attendance. Although partners were about to hear about the commissions they'd receive for selling Microsoft-hosted services and the ability for them to receive recurring monthly revenue, Elop was also likely aware that some partners wouldn't be thrilled about the idea of giving up control over their customers to Microsoft.
Microsoft gives partners the choice and flexibility of deploying on-premise software, Microsoft-hosted services, or partner-hosted services. But later this year when Microsoft begins selling services through partners, it will take over control of billing, branding, pricing and service delivery.
Although Microsoft said this will help partners focus on value-added services, and isn't a sign that Microsoft plans to someday cut partners out of the loop, some partners who knew of these plans before the conference were steaming mad when they arrived at WPC. Which is why Microsoft went to great lengths at the event to demonstrate where the opportunities lie for partners in Software Plus Services.
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Microsoft will give 12 percent of the first year's subscription value and 6 percent of the ongoing service fees to partners that sell its Online portfolio of hosted services, which includes Exchange, SharePoint, Office Communications Server, and Office LiveMeeting.
Slated for launch sometime later this year, Exchange Online will be priced at $10 per user/month, SharePoint Online per user/month will be $7.25, Office Communications Server Online will be $2.50 per user/month, and LiveMeeting will be $4.50 per user/month. Microsoft will offer these services in one-year automatically renewing agreements.
Microsoft's partners who've been hosting their own Exchange and SharePoint services for years are one group for which the benefits of recurring revenue are quite clear. They're also familiar with the notion of wrapping additional value-added services around their offerings, such as support for multiple mobile device technologies, for example.
There are many chances for service providers to identify the gaps that Microsoft isn't filling, said Michael van Dijken, lead marketing manager for Microsoft's hosting business, in an interview at WPC. "This is a new area for Microsoft and our partners," said van Dijken. "Clearly, there have been concerns over Microsoft being perceived as competitor, but service providers realize that the market is changing, and they're quickly trying to identify opportunities."
Microsoft is essentially creating a hosted services equivalent of the existing Microsoft stack and partner opportunity ecosystem by virtue of encouraging partners to offer their own hosted services on top of its own, said Andrew Brust, chief of new technology at twentysix New York, a New York-based IT consultancy.
"Microsoft is saying partners can make money first and foremost by adding value to its base offering, and by helping them sell the platform, they'll reward you again," Brust said. "That's a great approach if it works, because it's the model the partner system is based on now."
Hosting providers are sitting in the proverbial catbird's seat, as they stand to gain more revenue as a result of Microsoft's refusal to allow VARs, at least at this stage of the game, to offer partner-branded, or white-label services. And VARs that are already seeing healthy revenue streams from white-label partnerships with hosting providers say they're making far too much money to consider giving up control to Microsoft.
For now at least, Microsoft said solution providers and customers can still opt for on-premise versions of the software or hosted software from Microsoft hosting partners. And many solution providers say they will do just that.
"We already make more money than Microsoft is offering us, and we don't have to share ownership," said Marc Harrison, president of Silicon East Inc., a Manalapan, N.J.-based solution provider. "It's very clear that in no way will the profit that comes from reselling hosted services come anywhere close to what we have been making maintaining these services for clients on an on-site server."
It's highly possible that some VARs could choose to avoid Microsoft hosted services in favor of services they can white label from hosting partners, said Matt Makowicz, principal at Ambition Consulting LLC, a Somerset, N.J.-based solution provider. "If I'm not going to be able to brand my own services to customers, they'd better be backing me up, and Microsoft hasn't done a great job of showing partners where they fit in," he said.
White-label services would be especially attractive for VARs in the SMB segment, where VARs have longstanding relationships as trusted advisors to their customers, said Michael Cocanower, president of Phoenix-based solution provider ITSynergy. "Customers would appreciate an offering that we privately label as one component of our overall offering to them," said Cocanower.
Such a scenario would be unfortunate, however, because Microsoft needs the strength of its entire partner ecosystem in order to attain its goals with Software Plus Services, according to Chris Teets, general manager at M3 Technology Group, a Charlotte, N.C.-based solution provider. "It is very, very important for Microsoft to have the whole partner community accept this. And in my opinion, they're putting a lot of good steps in places to make sure that happens," he said.
One of these steps was to develop a system that would enable partners to be recognized for their contribution to the sales, even when they're not handling the actual sale. Microsoft will share ownership of the customer with the channel partner of record, who will administer and manage the services on behalf of the customer. Customers will buy services and sign agreements with Microsoft for the services, but they'll also sign agreements with their partners.
Matt Scherocman, vice president of consulting services at PCMS IT Advisor, a Cincinnati-based solution provider and Gold partner, said that this is Microsoft's way of ensuring that partners still get credit for the sale when they're not actually controlling the sale. "The one reason people aren't as upset is that you go on as partner of record and you still own the customer relationship. That's huge," Scherocman said.
Another example is Microsoft's decision to handle billing, paperwork and revenue collection from sales of services, which the company says resulted from feedback from VARs and integrators who said these tasks are prohibitively time consuming. Microsoft said removing that cost will allow channel partners to focus more on value-added services.
Some partners relish the idea of offloading time consuming reporting, billing and credit collection work to Microsoft. "This takes away the noise at the commodity services level," said Rick Oppedisano, vice president of marketing at M3 Technology Group.
Offloading management and maintenance should allow partners to focus on extending the technology to meet customers' business needs, said Todd Golden, co-founder and director of alliances at PointBridge, a Chicago-based solution provider and Microsoft Gold partner.
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The fact that traditional Microsoft partners are trying to figure out how to make money or compete against Microsoft's new offerings is completely understandable, says Ken Winell, CEO of Expertcollab, a SharePoint-focused solution provider in Florham Park, N.J. "Certainly, if I was a hosted Exchange partner, I would think my core model is threatened," he said.
"On the other hand, if I had an Exchange implementation business, I would be trying to figure out how I could capitalize on the offering and attach my firm's services and expertise, while taking advantage of the lower licensing costs and operating expenses," Winell added.
CRN interviewed several Microsoft channel partners at WPC who said they have no sympathy for VARs that grumble about the business changes Microsoft is requiring of them in Software Plus Services. Their message to disgruntled VARs is: Services expand the opportunity for partners, so shut up and sell them. PointBridge's Golden agrees. "If some partners fall off, there will be others that come on to fill the void very quickly," he said.
Channel partners that want to add value will have to study situations and find new places to do so, but these efforts will help them remain viable in the future, said Eilert Giertsen Hanoa, CEO and founder of Mamut ASA, an Oslo, Norway-based solution provider. "The alternative for partners who are not seeing this as a necessary evolution is that it will happen with Microsoft, or it will happen with someone else," he said.
In a QandA during his keynote speech last week at WPC, Microsoft CEO Steve Ballmer echoed this sentiment when asked to comment on the fears some hosting partners have that Microsoft will eventually compete with them. "I think it's probably fair to say that cloud services will grow faster than the hosting opportunity, but that doesn't mean hosting isn't going to grow," Ballmer said. "And certainly, if we don't do cloud services, our key competitors will do them, and we can't give them the edge and innovation that provides. So we're supporting both models."
Next Steps
Microsoft said it's in the process of training its partner account managers to clearly explain the benefits of Software Plus Services to channel partners, and is also developing online training and educational tools that partners can use to get up to speed, according to Marie Huwe, general manager of partner marketing in Microsoft's Worldwide Partner Group.
"The goal is to help partners describe the model, and reinforce that it's working today," Huwe said. "We want partners to understand the importance of the partner ecosystem and their role in the strategy, using real-world examples."
But while Microsoft made good progress at WPC in explaining the channel's role in the Software Plus Services future, some VARs told CRN they think the software giant still needs to work on its messaging. Ultimately, that's where the strategy will sink or swim in the eyes of the channel.