Some VARs Uncertain About Microsoft's Web-Services Gambit

Nov 30, 2005 (11:11 AM EST)

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Not surprisingly, Microsoft's decision to enter the software-as-a-service game has stirred a hornet's nest of speculation among its business partners, whose reactions thus far are divided. Some are embracing Microsoft's proposed services model as a potential new opportunity, while others are flat-out certain it spells bad news for their own businesses. Many, however, are simply undecided.

Consider the numbers. In an online poll of readers following the Microsoft "Live" news last month, nearly 1,000 respondents weighed in on the services topic. Their responses broke down in near-equal thirds--positive, negative and no impact--regarding whether Microsoft's plans to make a majority of its software products available as free or subscription-based services would hurt partners' businesses.

Industry analysts say polarity and division is to be expected at this point, as is lack of opinion. It's too soon for the channel to know exactly how this will play out, they say, especially given that Microsoft is still feeling its way toward what represents a fairly seismic shift in business models.

"On one hand, there is a value proposition for partners, so I think it is not appropriate [for VARs] to issue a call to arms to rebel against this," says Stephen Graham, group vice president of global software business strategies at IDC. "But, on the other hand, no one has really done a good job of mapping this out. The vendors themselves are still trying to figure out what this all means in terms of what they should be doing, never mind figuring it out for their partners."

Tom Prebula is owner of Advanced Business Networks, a solution provider in Boise, Idaho. Prebula is one of those partners who worries that the new services have the potential to "greatly" affect his business in a negative way. "If Microsoft takes over quite a bit of the software services, there goes a lot of my business," he says. "The only place there are any margins at the moment is in software. Customers are still going to have support issues, but I can almost guarantee that Microsoft will sell some kind of support with this."

Prebula says that if the new services cut into his offerings too much, he may have to lean more heavily on his networking and security business to make up the difference. "It would mean I'd have to be more focused on that," he says.

VARBusiness Online Poll
Are solution providers at risk from Microsoft's services move?
How might solution providers be affected?
Which Microsoft services would have the greatest impact?
Which market segments are most at risk?
Which market segments do you serve?
Prebula is not alone. More than half of VARs in the online poll said Microsoft's services initiative would decrease demand for channel involvement in deploying and selling Microsoft software and/or cannibalize their traditional Microsoft software business.

Here And Now

So far, the only services Microsoft has officially announced are the forthcoming Windows Live and Office Live, due out sometime in 2006. Described as complementary services to the traditional operating system and Office suite, they will be viable options for smaller customers that don't want a full on-premise implementation of the software. Going forward, however, Microsoft's chief software architect, Bill Gates, has said that nearly all of Microsoft's traditional portfolio--from servers to business applications--will sport a services component. Gates has described the effort to Microsoft employees as highly strategic.

From a partner perspective, the small-business-customer segment is key. That market, along with the consumer and gaming spaces, is where Microsoft is theoretically aiming its services components. The company estimates there to be roughly 5.2 million U.S. businesses that have fewer than 10 employees or five PCs. Many of these businesses also lack a server and are looking for basic IT business solutions online that they don't have to manage themselves.

This market is largely untapped by Microsoft's army of business partners, according to Allison Watson, group vice president of worldwide small business and channels at Microsoft. Indeed, 22 percent of VARBusiness poll respondents believe Microsoft's entry into services will broaden their opportunities within the SMB space. Watson cites this partner opportunity as one involving the creation of vertical or custom solutions that add value to Microsoft's services package.

Just how that works remains unclear. First off, some partners have questioned--logically--why a small-business customer with a limited IT budget would pay for additional partner offerings when he can get free services for his basic, vanilla e-mail, security patching and/or word processing directly from Microsoft. Second, how does an on-premise partner solution mesh and go to market with an online hosted service? That becomes further complicated by the fact that partners will not be tapped as the managed-service providers selling and hosting Microsoft's services. Microsoft announced last month that it would deliver its services from its own data centers.

Given these uncertainties, it's understandable that partners are stumped whether Microsoft's new direction is going to help or hurt business.

"After listening to Allison Watson describing what they're going to do, I still don't know what they're talking about, and I've been in this business 25 years," says Jon Tomar, president of Terrapin Information Services, a solution provider in Wheaton, Md.

"Customers are offered free services, and some are basic services you expect out of Microsoft Office, for example," Watson explained in a recent interview with VARBusiness. "Partners can customize and extend those services. The models for how that gets done are still being worked out."

Nearly 42 percent of partners VARBusiness surveyed agree with Watson that Microsoft services will open doors to customization and vertical opportunities.

Watson added that Microsoft will create a catalog of partners offering the aforementioned extended solutions that will be provided to customers when signing up for Microsoft services.

Tomar says that he expects Microsoft's entry into basic online software services will motivate his company to expand its more complex and higher-margin services. That's exactly the direction and attitude analysts say partners will need to succeed down the line.

Rob Enderle, principal analyst with the Enderle Group, says the software-as-a-service model will force VARs to offer more personalized solutions tailored to customer needs and verticals--a direction many of them should have been moving toward all along. Still, other analysts say there is less to fear from Microsoft than one might expect, because the folks in Redmond have no intention of letting their services offerings cut into their traditional flagship Windows and Office sales.

"Microsoft is tiptoeing around the traditional notion of software-as-a-service," says Dwight Davis, an analyst with Summit Strategies. "They made a big to-do over Microsoft Live, but this will not compete with the other versions of their products. In fact, it will enhance the sales of those packages. What they have done is very safe and very smart."

Ed Scannell and Luc Hatlestad contributed to this article.