Microsoft Sets Hosted-services Pricing, Irks Partners

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Microsoft Tuesday revealed pricing for its forthcoming hosted business productivity services and unveiled its channel model for allowing partners to resell those services. However, while the company painted a rosy picture for the partner opportunity around its evolving software-plus-services business model, not all of its partners were thrilled with the idea of Microsoft competing with them in that market.

As part of its plan to transition from providing only on-premises software to a combination of software and hosted services, Microsoft early next year will begin offering a hosted business productivity suite that includes Exchange Online, Office SharePoint Online, Office Communications Online and Office Live Meeting for US$15 per user, per month.

The company unveiled the pricing for its forthcoming hosted services at its Worldwide Partner Conference (WPC) in Houston this week. Microsoft's hosted services partners already can offer customers this package through Microsoft's Hosted Messaging and Collaboration 4.5, which the company released two weeks ago.

Individually, Microsoft will be selling hosted Exchange Online for $10 per user, per month; SharePoint Online for $7.25 per user, per month; Office Communications Online for $2.50 per user, per month; and Office Live Meeting Online for $4.50 per user, per month.

This means if customers buy the entire suite, they are getting a 38 percent discount than if they buy the products individually, said Microsoft Director of Online Services Eron Kelly on a conference call Tuesday.

On top of its hosted business productivity services, Microsoft also introduced two "deskless" offerings that allow companies to offer workers who don't necessarily sit in front of PCs but still need access to e-mail and internal company Web sites access to those online services. Exchange Online Deskless Worker and SharePoint Online Deskless Worker will be available for $3 per user, per month early next year.

Microsoft's is facing competitive pressure from Google, which is offering similar hosted services to business customers, and so had to price its hosted services competitively.

But this also puts them in direct competition with hosted-services partners that have been offering their own hosted services using Microsoft software infrastructure. And its traditional reseller partners also won't see the kind of margins in reselling services that they've seen with reselling software licensed in the traditional per-CPU way, they said.

One former Microsoft partner who asked not to be named suspects that Microsoft knew it would cause its hosting partners grief if it went ahead and offered its own hosted services, but thought it was a small price to pay compared to losing that business to Google.

"I think they looked at one hand [and] they looked at Google, which was causing all kinds of headaches and is tough competition, and looked at a set of long-term hosted Exchange partners and thought, 'Who can we afford to [tick] off more?' " he said. "It's obvious what they chose."

Danny Essner, director of marketing for Microsoft hosted Exchange partner Intermedia, said Microsoft's pricing for its hosted services is "very aggressive" and will force the company's hosted partners to "move up the stack to preserve profit margins."

For example, Intermedia can offer mobile e-mail support for BlackBerry users on a hosted version of Exchange, while Microsoft does not offer this service.

However, even if hosted partners may have to work harder now that Microsoft is competing with them, Essner said the fact that Microsoft is "bringing market education and market awareness" to the hosted services space is a good thing for anyone providing these services.

Indeed, Scott Gode, vice president of marketing for another Microsoft partner, Azaleos -- which offers managed services for Exchange customers that install the software on premises -- said many customers prefer to have their proprietary e-mail hosted on site rather than farm that out to a third party.

"There is still a huge percentage of customers that will run it locally and want to run it locally because of security concerns," he said of Exchange.

But even if Microsoft knew some partners might be unhappy with their new, yet necessary, business model, the company certainly doesn't want to cut its loyal partner channel out of its services strategy, which is where it's new customer-referral model around hosted services comes into play.

Partners can offer Microsoft's hosted business productivity services to customers and receive 12 percent per user, per month, up front for a first-year contract, and 6 percent per user, per month, of the ongoing subscription fee, the company said. So in the first year, resellers of hosted services will receive 18 percent margins on the subscription value, and 6 percent for subsequent years, Microsoft's Kelly said.

Microsoft also is encouraging partners to add value to the sale by doing what they have always done best, offering integration, consulting and management services on top of any vendor products their customers buy, whether hosted or on-premise.

In an interview Tuesday after her keynote at the WPC, Allison Watson, corporate vice president for Microsoft's worldwide partner group, said Microsoft studied subscription-based partner models in other markets -- such as the mobile business market -- and did extensive work with partners to help come up with the margin percentages for its hosted services

"Not only are the upfront fees fair for the referral, but the follow-on fees allow [partners] to build a rich annuity stream," she said.

However, Watson did acknowledge that some partners are worried that by reselling Microsoft's hosted services in a referral program, they will be doing a lot of the legwork to secure customers and lose control by merely turning them over to Microsoft, since the company handles the support and billing for the services.

She attributed this to fear among partners that they will not be part of the ongoing relationship with the customer, which is not the case.

"The concern you've heard is valid and I hear that as well," Watson said. "But once we sit down and walk them through the user experience of the customer and partner interaction online, it will create good optimism about their ability to be a rich part of the solution."

For instance, for partners who manage current customer Enterprise Agreements with Microsoft, the company's hosted business productivity suite will be just another product SKU in that agreement, she said. This means that partners will get existing revenue margins on Microsoft hosted services that their customers purchase just as they would on any other product, and continue to maintain their relationship with customers, Watson said.

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