Microsoft Appears Up To Its Old Tricks When It Comes To Discount Inequities

Five years ago, Industry Editor Barbara Darrow and I reported on a situation in which OEMs and solution providers claimed Dell Computer and Gateway were getting steep discounts on Microsoft Office bundles. Large OEMs and VARs groused that they couldn't compete and said the move essentially paved the way for Dell and Gateway to gain market share in the then hotly contested PC arena. Ultimately, Microsoft changed its policy to make things more equitable among the PC manufacturers and VARs.

But it appears that Microsoft has not learned from its past mistakes. This time it is PC Connection and CDW Computer Centers that are benefitting, with solution providers once again getting the short end of the stick.

As reported in Paula Rooney's story on page 3, Microsoft is working with these direct marketers on promotional campaigns that let them offer small businesses discounts of up to 42 percent on Office XP and Windows XP. The result: The developer is undercutting its loyal SMB solution providers and allowing CDW and PC Connection to poach on these accounts.

Why is Microsoft doing this, and why is the vendor more vulnerable now than it was five years ago?

First, from all indications, one of the few market segments investing in IT is small businesses, and therefore everyone from direct-sales reps to direct marketers to solution providers is competing for a piece of this customer segment.

My assumption is that it's easier for Microsoft to work with two large direct marketers than the thousands of small solution providers serving the SMB market. But in arranging a special deal, Microsoft is taking one step forward and two steps back.

With such steep discounts on Office XP and Windows XP (which makes me question the success rate of Windows XP adoption), small businesses may decide to buy from CDW instead of local VARs. But what happens when the customer needs support? They call the solution provider. So now Microsoft has an unhappy customer and a disenfranchised partner.

Consequently, the next time that customer needs a database or a mobile application, those same small VARs may steer the customer to the Palm OS or to an IBM offering.

Worse yet for Microsoft, when those small VARs get a new small-business account, they may recommend a Linux solution.

What Microsoft apparently fails to see is that SMB solution providers should be viewed as one community with collective power. It is not only small VARs that service this customer set, it is also the white-box community, which loads software onto their customized PCs and servers.

Intel learned about this the hard way. White-box suppliers claimed Intel was giving Dell a better price, and channel loyalty dropped. Intel reacted with measures to help white-box builders and, as a result, channel sales have become one of the chip maker's strongest areas in the past year.

Microsoft, for its part, first has to acknowledge that there is a problem in its channel strategy. Second, the company needs to view the SMB solution provider community as a constituency that collectively wields substantial power. Finally, Microsoft should adjust its marketing tactics to provide equal opportunity to its partners.

Five years ago, Linux was not a viable alternative. Today it is. And if Microsoft can't break its old habit of adopting unfair pricing models, solution providers that don't view the company as a true channel partner won't break their habit of switching customers to another vendor's product line.

Are you listening? Do you agree? I can be reached at (781) 839-1272 or via e-mail at [email protected].