Microsoft walks tightrope with business services

The company has good reason to expand into services and hosted software, but it must be careful not to alienate partners.
Written by Ina Fried, Contributor
As part of its overall services push, Microsoft has been quietly trying to figure out just what it can offer up to large corporations.

The software giant has yet to announce a broad set of "Live" services for enterprises. But the company has said it is working in that area, and it has launched several tests of possible services. CEO Steve Ballmer detailed one of those efforts at a meeting last week with financial analysts.

"We are in test with a service that essentially will help host Exchange and SharePoint and Office Communication Server for large account customers," Ballmer said. He indicated that the company would test the service with three or four customers.

Microsoft would not provide further details on the service, including when it might be more broadly available or what role partners will play in its delivery. Company spokesman Tom Ryan did say that the company is building the means by which it and its partners can run hosted software.

"We want Microsoft customers to have rich choices," Ryan said. "This certainly will be another choice for them."

While much of the attention around Microsoft's services push has focused on consumer Web services and the battle with Google, both Ballmer and Chairman Bill Gates have talked about the need for corporate services, though both have been short on details.

Microsoft has added services in a few areas, such as e-mail and security, and it has been working to add host-ability into many of its server products.

Microsoft also has been dabbling in some entirely new areas, such as its managed services effort, which is handling a broader array of IT work for two companies. Since 2005, Microsoft has been managing the desktop computers for Energizer, handling things like helpdesk issues. Last year, the company added a second customer, XL Capital. The effort was initially part of its own IT department but has since been moved under the auspices of server and tools boss Bob Muglia.

"Microsoft is looking at the open-source thing and also looking at Oracle and IBM. It's looking at those companies and saying, why can't we do that?"
--Paul DeGroot, analyst, Directions on Microsoft

"I wouldn't be surprised at all that there are some other offerings that are going to emerge," said Paul DeGroot, an analyst at market research firm Directions on Microsoft. "They'll probably look different from what Microsoft has done so far. This process was harder than they anticipated."

Ballmer also said in his speech to the financial community last week that it is hard to say just where things will go. "We will certainly roll that out," he said of the hosted Exchange, OCS and SharePoint service, but then added, "How quickly and how big the impact, again a little less clear visibility, but a very important opportunity for us of a subscription nature."

In some senses, Microsoft's move to offer services to big businesses makes sense. Unlike in the consumer arena, where it faces an uphill battle to catch up to Google, the enterprise is more Microsoft's home turf and an area where it already has broad relationships. That said, while most big businesses get software from Microsoft, they are more likely to get services from other companies such as IBM, Oracle and SAP.

Google has begun to show more interest in business services, however. On Thursday, the company announced a new bundle of application services aimed at businesses. The new hosted service, Google Apps Premier Edition, priced at $50 per user annually, includes email, spreadsheet and document creation tools, along with other business-oriented features.

Microsoft may see such revenue as a straightforward way to expand its business at a time when it is being pressured to grow faster.

"Microsoft is looking at the open-source thing and also looking at Oracle and IBM," DeGroot said. "It's looking at those companies and saying, why can't we do that?"

But such a move is also fraught with challenges, such as the potential impact Microsoft's service offerings will have on its partners, which get much of their revenue from services that they sell on top of Microsoft software.

Plenty of partners today, for example, offer either desktop management services, hosted Exchange or both.

"Microsoft has to be careful here," DeGroot said. "It will be a significant area, I think, of partner conflict."

The potential for conflict is not new for Microsoft or its partners. Software makers that write Windows applications long have worried about where Redmond would go next in terms of either adding features to the operating system or building new software products. The company has long eschewed offering any kind of long-term plan of where it would and wouldn't offer products. "Basically, they don't want to rule anything out," DeGroot said. "I don't think there is much likelihood partners will get much relief on that score."

But the risk of uncertainty isn't only for Microsoft's partners.

The partners that sell Microsoft's software have historically made much of their money by tacking lucrative services on top of software sales, which often have low margins, DeGroot said. To the degree their services revenue is threatened, partners could have an incentive to sell Linux-based options or other products that compete with Microsoft's software.

Already it is sometimes the case, DeGroot said, that a partner can offer a Linux-based option to a customer that costs roughly the same to the business but offers more revenue for the partner because of the services opportunity. "In some cases they would much rather do Linux," he said. "It's kind of a dirty little secret."

A move by Microsoft into hosting Exchange directly could push partners into directions that are not good for the software maker. If they can't make enough money on Microsoft software and services, DeGroot said, "the partners may look for alternatives."

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