Microsoft Embraces Web With Hosted Services

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Though the quest to acquire Yahoo dominated news surrounding Microsoft's Web strategy in 2008, another story was brewing quietly behind the scenes that could be even more significant for the company in the long run -- its move to offer hosted business productivity services.

The company makes much of its revenue from selling software licenses to enterprises. Those customers are starting to see value in using software that's hosted remotely on the Web -- or in "the cloud" -- and less in building out expensive IT systems in-house, which is becoming even more cost-prohibitive now as economies around the world falter.

Even as it attempts to battle Google for a share in the online advertising market by offering hosted consumer services, Microsoft is keenly aware that the needs of its business customers are changing. In 2008, Microsoft delivered on a strategy it unveiled several years ago and offered the first hosted versions of key software infrastructure -- Office Exchange Online and SharePoint Online. The company plans to roll out hosted versions of Office Communications Server and Live Meeting in early 2009.

These services, even more than its online advertising strategy, indicate that Microsoft is embracing the Web as a business model and could be more significant to the company's bottom line in the long run.

"When Microsoft says, 'We are willing to make a change in how we do our core business,' that's a pretty big deal," said Matt Rosoff, analyst with Directions on Microsoft.

He said if Microsoft can get "some of its traditional big customers to online services," that revenue stream could be far more important to the company than online advertising revenue, at least in the short term.

"From Microsoft's perspective, that's much more significant than the whole search thing," Rosoff said. Search and online advertising revenue is "the future," he said, but Microsoft stands to gain much more from its enterprise customers that buy hosted services in the near term.

As the year closes, Microsoft's future in search isn't looking too promising. A comScore Networks report on online search market share in November gives Microsoft's Live Search 8.3 percent -- matching a low for the year the company also hit in August -- while Google had a commanding 63.5 percent of online searches. A deal for Microsoft to purchase either Yahoo's search business or the entire company also is still up in the air and widely rumored to be in the works as the end of 2008 approaches.

Hosted business services, however, is an area where Microsoft has an edge over Google, since Microsoft already owns many of the enterprise customers that would purchase them. Google has a tougher play with its own hosted business productivity services, since it has not proven yet it can compete in the enterprise market and does not have years of a successful software business to back it up.

Individually, Microsoft is now selling hosted Exchange Online for US$10 per user, per month and SharePoint Online for $7.25 per user, per month. When they are available, Office Communications Online will cost $2.50 per user, per month; and Office Live Meeting Online will cost $4.50 per user, per month. Early next year Microsoft also will offer a suite of all of these services for $15 per user, per month.

Though it's too soon to tell how many of Microsoft's enterprise customers will switch from buying packaged software from Microsoft to embrace this new model, at least the company is positioning itself for what many believe is the next significant phase of enterprise IT, software as a service, or SaaS.

In typical fashion, Microsoft has given its own name to its SaaS strategy, calling it "software plus services." The company first revealed the strategy in a keynote by Ray Ozzie in Boston at its TechEd 2007 conference, saying that it would begin offering business services on a hosted basis but continue to offer packaged software in its traditional licensing model as well.

Ray Wang, a vice president at Forrester Research, said this "hybrid" business model makes sense for Microsoft, which has to keep its enterprise licensing customers happy. Not all of them are ready to move to SaaS, even if the trend, which has been hyped for years, is finally turning into reality for IT customers.

"There are so many customers that don't want to move to services," he said. "What Microsoft is doing is providing another option, another delivery option."

While Microsoft's move to hosted services will be good for the company and its enterprise customers, it has been disruptive for the company's hosted-services partners, with whom Microsoft now is competing. Even before it decided to offer its own hosted services, Microsoft allowed partners to host its software infrastructure for their customers.

Serguei Sofinski, CEO of Intermedia, a Microsoft hosting partner, said the vendor's "aggressive pricing strategy" pressures profit margins for partners, who will have to diversify their offerings and providing other value to customers to stay competitive.

However, like other hosting partners, he said his company is taking it in stride, and thinks that Microsoft entering the market alerts customers to the business model Intermedia and other SaaS providers have supported for years.

"Partners will benefit from the market awareness that Microsoft can generate for the software-as-a-service delivery model," Sofinski said. He said that while today only 1 percent of deployed Exchange seats are hosted, he expects that rate to increase to 15 percent to 20 percent by 2012 through Microsoft's efforts to educate customers about hosted services.

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