Microsoft: EDS Deal Could Mean $3 Billion In Services

Microsoft says it has signed up more than 4,000 partners to sell its hosted business applications, including several of the industry's marquee solution providers. But interest in Microsoft's hosted services is still lukewarm in the lower end of the market, and some VARs are calling on Microsoft to step up its marketing efforts.

Microsoft on Monday revealed terms of a deal with HP-owned EDS to jointly market and sell its Business Productivity Online Suite (BPOS) to large multinational companies. BPOS, which includes hosted Exchange, Sharepoint, Office Communications Server, and Live Meeting, is now available in 19 countries worldwide. Microsoft says the EDS deal could be worth up to $3 billion in cloud services and professional services.

The EDS deal underscores Microsoft's progress in getting customers on board with Software Plus Services, the company's term for a future that involves a mix of on premise software and cloud-based services. Microsoft says it plans to eventually offer all its enterprise applications as services, and the launch of Windows Azure is expected to bring that strategy into clearer focus later this year.

John Betz, director of the Business Online Services Group at Microsoft, says Microsoft sees BPOS as an option for companies of all sizes, and notes that solution providers will be able to surround BPOS with value-added migration, support and end user management services.

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"We see demand for BPOS across the entire spectrum of organization size. In some ways, the value to smaller organizations is greater because they have limited IT staff and budgets," Betz said in an interview. With BPOS, they can avail themselves of an enterprise-class experience with an investment of just $15 per user per month, he added.

However, many smaller Microsoft partners have yet to see much traction around BPOS for a variety of reasons, some which they attribute to market forces, others to Microsoft's steadfast insistence on controlling the customer billing relationship and not allowing VARs to offer white-label services.

"People don't want to resell someone else's labeled products, they want to have their own branding," said Marc Harrison, president of Silicon East, a Microsoft solution provider in Manalapan, N.J.

Microsoft VARs that sell BPOS receive 12 percent of the first year's subscription value and 6 percent of the ongoing annual service fees from reselling the suite. Microsoft says it soon will let partners place tailored BPOS orders for customers and designate themselves as the "partner of record" and receive commissions for their role in influencing the sale. But Microsoft has thus far refused to budge on the customer billing issue.

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Harrison compares the situation to that which followed Microsoft's launch of the Open Value volume licensing program, when the company told VARs it would take control of customer billing and send partners commission checks for selling Open Value. But Microsoft eventually reversed course and decided to let partners handle billing, according to Harrison.

"It's surprising that they haven't learned a lesson from that experience," Harrison said.

Arlin Sorensen, president of Heartland Technology Solutions, a Harlan, Iowa-based Microsoft Gold partner, hasn't seen much traction around BPOS and says Microsoft hasn't yet identified a clear path for VARs to build business around BPOS.

"The opportunities Microsoft is talking about aren't yet in the SMB space, that's for sure. We're going to need education on how BPOS can meet these companies' needs, and a lot of work still needs to be done before this takes off," Sorensen said.

That's not to say that BPOS success has been limited to the larger Microsoft VARs, however. In the past four months, Chicago-based solution provider PointBridge has added 3,000 BPOS seats representing about $100,000 in revenue, says Microsoft's Betz.

Todd Golden, co-founder and director of alliances at PointBridge, which began selling BPOS last year, expected early adopters to be midmarket firms with small IT staffs that were looking to outsource various services. But Golden says he's been somewhat surprised by the interest level in BPOS from enterprises, many of which are turning to BPOS as a way to migrate off of legacy products.

Golden believes there is demand for BPOS in the midmarket and SMB, and that both Microsoft and its partners will need to work together in order to address it. "We are selling to smaller customers, and I think there is demand out there," he said. "There just hasn't been a whole lot of air cover marketing done yet, and reaching those smaller customers is going to be a challenge."

The fact that many solution providers who serve SMB clients also sell managed services could be a source of hesitation when it comes to marketing BPOS to customers, added Golden.

Chris Rue, CEO of Black Warrior Technology, a Northport, Ala.-based solution provider and Microsoft partner, says the progress Microsoft has made with BPOS thus far is encouraging for the channel, despite the implications BPOS poses to VARs' traditional revenue streams.

"The big issue is whether BPOS is a solution that has partnering as its focus -- that's the question that has yet to be answered," he said.

"But eventually I think most VARs will realize that the business model is shifting, and over time, where VARs make their money will shift, too," said Rue.