Microsoft: On Demand

Green with envy, Microsoft has watched the Google juggernaut reap in millions of new customers and billions of dollars in revenue by giving away software and services. Microsoft has seen rivals come and go, but Google—probably the only company since Xerox to transmute into a verb—is different. It gives away its software and services to attract users and makes money through sponsorships of search results. It's Microsoft's worst nightmare—a competitor it can't muscle out of the market by undercutting prices or cornering through OEM agreements.

Now, by offering Windows Live and Office Live as a sponsor-based service, Microsoft hopes to capture an even greater share of the 5.2 million U.S. small businesses (companies with roughly five PCs and fewer than 10 employees). Soon, consumers and small businesses will be tapping away on a Web-based version of Word that could look and feel somewhat like a free Hotmail e-mail service—complete with ads. Microsoft could reap untold millions in new advertising revenue and transform its iron grip on the desktop to a commanding control of Internet-based applications.

The logic for the shift is simple. Microsoft has been trying to ramp up a search engine to compete with Google and Yahoo. But its bugs have plagued the project and the existing players have a significant head start. Because Google can't be undercut in price, Microsoft is taking the build-up approach. If it establishes a significant presence in Internet-applications services, it can repeat the browser-wars strategy: push up vertically with a new offering, then move laterally to capture greater market share.

When the late-arriving Microsoft dove into the browser market, Netscape had a significant and seemingly insurmountable lead. Microsoft robbed Netscape of its advantage by integrating and bundling Internet Explorer with Windows. That made the entire desktop-operating system a Web-browsing system.

The same thing is about to happen in the antivirus market. In 2001, the last time Gates penned a "sea change" memo, it was security that plagued Microsoft. Under pressure from major enterprise customers, Microsoft resolved to fix its faulty Windows code. In the first year, it spent hundreds of millions of dollars scrubbing the Windows code base and retraining developers. However, the long-term plan called for making money from security. Microsoft now holds significant antivirus, antispam and antispyware technology, which many expect will overwhelm market leaders Symantec and McAfee.

The big question: How do Microsoft's 200,000 channel partners fit into the services equation? Is this a new opportunity for solution providers to sell on behalf of Microsoft? Or, is Microsoft on a collision course with the partners it has mobilized to conquer the midmarket and SMB space?

Microsoft says its partners are an intricate part of its plans and that their businesses will benefit. "This opportunity is a broadening opportunity," said Allison Watson, Microsoft's vice president of worldwide partners, during a VARBusiness Podcast interview. "Our customers...will still need access to their Windows environment and their desktop-client applications—we don't see that changing at all. These services will now be available to them and be a sweet spot for partners to make their computing environment even more relevant."

It's an optimistic and plausible assessment, but not necessarily reassuring. The channel community is evenly divided on whether Microsoft's services initiative is a blessing or a curse (see "Microsoft's Services Gambit," page 18). Many see the opportunity, but almost an equal number say it will hurt their ability to serve small customers and could cannibalize sales.

Microsoft has a lot of work to do if it wants the "Live" strategy to work. It must pull off the technical challenges of providing fast, reliable Web-based applications, satisfy sponsor demands and resolve inevitable channel conflicts with the same partners it has been pushing to attack the lower end of the market.

A pretty tall order, indeed. But Microsoft always seems to find a way to pull off the impossible and stay on top. Google may be the initial force, but it doesn't have the track record of success or the support of a massive channel community that Microsoft does. In the end, you can never count Microsoft out of the game.

VARBusiness will be following Microsoft's latest transformation. I invite you to share your opinions and observations; drop me an e-mail at [email protected].