Microsoft Office 365 Signals Huge Cloud Shift

Apr 19, 2011 (06:04 AM EDT)

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Microsoft's Office 365 productivity platform entered public beta on Monday, and the company says more than 100,000 would-be customers will test the online service within the next few weeks.

It's a powerful indication of the interest in on-demand email, collaboration, and communications, as delivered through Office 365's combination of online services: Exchange (email, calendar, and contacts), SharePoint (document sharing and team collaboration) and Lync (instant messaging, videoconferencing, and meeting).

Given Microsoft's dominant share of the on-premises email software market -- Exchange has a worldwide installed base of 360 million mailboxes, according to Radicati Group, exceeding 70% market share among businesses with more than 500 PCs, adds Microsoft -- Office 365 can't help but boost cloud computing adoption, even if customers end up using a competing service. Here's why.

Software-as-a-service (SaaS) email and collaboration alternatives have been around for years. In fact, Microsoft followed Google, Zoho, and smaller competitors into this market. Office 365 itself is a replacement for a jumble of existing Microsoft services, including the two-year-old Business Productivity Online Suite (BPOS), Microsoft Office Live Small Business, and the free educational service Live@edu.

These options notwithstanding, CRM is currently the top SaaS application, used by 44% of businesses that use some form of SaaS, according to a 2010 survey by InformationWeek Analytics. SaaS email came in third, at 35%, behind Web-presence apps (for managing Web sites), used by 38% of survey respondents. Collaboration apps (including wikis and instant messaging) were a distant sixth, at 29% adoption among SaaS users.

These stats could change quickly once Office 365 debuts later this year, on a date yet to be announced. That's when tens if not hundreds of thousands of IT decision makers who sign Microsoft enterprise agreements will have a new option to migrate users online. To put the current SaaS mix into perspective,, the market share leader in on-demand CRM, last reported slightly more than 92,000 customers.

Microsoft customers must currently license all their users for software and then pay a discounted "step-up" fee to add BPOS services. Setting cost differences aside for the moment, a change in the licensing approach with Office 365 will make an important psychological difference. For the first time, enterprise customers will see clear on-premises versus on-demand pricing alternatives as well as tallies of users in each environment. This alone will invite examination, even among risk- and change-averse IT executives who might not have otherwise investigated on-demand alternatives.

Bottom line: Microsoft's invitation to consider an on-demand alternative will have lots of fresh eyes looking at the cost of running email and collaboration software and underlying hardware on-premises.

A Look at Cost

As for Office 365, for small businesses starting with one to 25 employees (and topping out at 50 users), the cost will be $6 per user, per month. This package includes Exchange, SharePoint, and Lync services as well as access to Office Web Apps (lightweight Web versions of Word, Excel, SharePoint, and OneNote). It also includes a SharePoint-managed Web site and "Community Support," which means access to a knowledge base and discussion threads, but no phone support.

Enterprises get round-the-clock phone support as well as a few critical administrative controls not currently available in BPOS. For example, single-sign-on lets users sign on once and traverse sites and services provisioned on-premises or on-demand.

Role-based access controls let administrators use a single console to control which users get access to which resources and services, whether they're delivered on premises or on demand. The same goes for presence awareness for Exchange users, so you can see who's free and who's busy whether they use internal or external servers.

Enterprise services start at $10 per user, per month, which matches the current BPOS cost, but the latter doesn't include the single-sign-on and administrative capabilities described above. The next step up is $16 per user, per month, which adds access to the Office Web Apps, which weren't previously available with BPOS.

The Web apps are suitable for viewing and doing light editing of Office documents, but they're not the same as the conventional client applications. (As I'll explain in a moment, these prices don't include the full versions of the Word, Excel, and PowerPoint apps most closely associated with the Office name -- a point that has confused many customers.)

It's tough to compare software license costs to SaaS fees, given that the latter include behind-the-scenes hardware and operational costs. But at these prices, which will be presented during enterprise agreement renewal talks once Office 365 is released, even recalcitrant CIOs are likely to consider the options (and surely alternatives like Google's). By Microsoft's calculations, a typical midsize enterprise with 1,000 employees can cut IT costs by as much as $350,000 per year by moving to these services. That's counting hardware, operations (including people), and upgrade costs over six years.

Echoing reports we've heard from other cloud computing vendors, Microsoft says its on-demand scale and capacity utilization give it big cost advantages over most on-premises deployments. Results vary, says Microsoft, but customers using BPOS report savings of 10% to 50% over on-premises costs.

There are well-run IT shops that are highly automated and have maximized capacity utilization. But these tend to be among the largest organizations, with tens of thousands to hundreds of thousands of users, says Microsoft. There are also organizations that, for security and governance reasons, will keep all or most of their email and collaboration capabilities on premises.

Microsoft can point to a 99.9% uptime guarantee and plentiful security provisions for Office 365, but the trump card here is choice. Customers can remain entirely on premises or manage a hybrid deployment as a single environment.

David Michael, the CIO at UBM TechWeb, a unit of London-based United Business Media, the company that publishes this site and InformationWeek magazine, says he and other IT execs in the company are currently looking for a companywide replacement for a mixed bag of email deployments. Michael wants to move as much as possible into the cloud, but he says he has found that he'll have to keep email for the company's top executives on-premises.

In another complication, email for certain business units in Europe has to remain outside of U.S. data centers, due to concerns (and related policies) in some countries that the U.S. Patriot Act could subject private data to U.S. Government scrutiny. What's more, UBM will have to use an on-premises deployment as a long-term staging area from which to move mailboxes into the cloud.

Michael has looked at both BPOS and Office 365 (as well as competing alternatives), and the pricing from Microsoft has been aggressive, he says, though he can't cite figures because of nondisclosure requirements. Things got that much more aggressive, he says, when he mentioned he was looking at Google Apps. Michael also mentioned to Microsoft the prospect of InformationWeek editors writing about their Office 365 experience "so I told them it better work," he says.

As beta customers will soon find out, the hybrid deployment and administrative options go beyond single-sign-on and role-based access controls. Office 365 adds the SharePoint MySpace page not available in BPOS, and this personal profile and collaboration feature can be deployed in the cloud while integration-intensive SharePoint applications and customizations can remain on premises.

Similarly, extranet sites that need to be shared with partners and customers can be deployed in the cloud, while sensitive intranets remain on premises. Internal users with access to it all will have no idea which resources reside where, says Microsoft, because Office 365 delivers a seamless sign-on, access, and navigation experience.

Microsoft says Office 365 customers can expect regular updates and improvements to their services about every 90 days, but sometimes businesses don't like changes. Thus, Microsoft says there will be notifications about disruptive changes, and customers will be able to opt out for up to a year.

Adding Productivity Apps

The name Office 365 confusingly suggests that the Office suite has been moved to the cloud, but that's not the case. Enterprises can pay $24 per user, per month (adding $12 to the $16 per user, per month service level described above) to license Office Professional Plus (which includes Word, Excel, PowerPoint, OneNote, SharePoint Workspace, Outlook with Business Contact Manager, Publisher, Access, InfoPath, and the Lync communications client).

This is conventional, client-installed software sold on a subscription basis. For enterprises looking to turn capital expenditures into operational expenditures, it's an option that adds flexibility.

Office Professional Plus can also be purchased outright for $499 list (with volume discounts available). For those considering long-term costs, you'll pay for it in 42 months if you divide by the $12 per user, per month subscription fee. But at the $24 per user, per month level, Microsoft also throws in advanced archive capabilities, unlimited email storage, and hosted voicemail, so read the fine print.

Customers can also use lesser Office bundles with Office 365, such as Office 2007 SP2, Office 2010, or Office 2008 for Mac, but Office Professional Plus is the only bundled subscription option.

At the extremes of the Office 365 line, there's also a $2 per user, per month Web email and Web Office Apps option for "kiosk users" and a $27 per user, per month service that including everything in the $24 service, plus VoIP services to replace or supplement an existing PBX.

With its $6 per user, per month bundle for small businesses, Microsoft is going after Google's stronghold at the low end of the market. Indeed, Microsoft says about 70% of the 100,000-plus organizations signed up for the beta are small businesses, and it has skewed its messaging and marketing that way.

But there are also some 30,000 midsize and large enterprises set to try Office 365, and that could lead to hundreds of thousands of new on-demand users. The vast majority of beta testers are existing customers, says Microsoft. Once the beta period is over, they'll have 30 days to decide whether to stay entirely on premises (with new or old software), move some users onto one or more levels of Office 365 services, or walk away from Microsoft entirely (assuming any existing enterprise agreements have also expired).

Barring major service disruptions or other highly public failures during the beta period, my educated guess is we'll see a lot of the middle choice and a corresponding shift in the numbers of enterprises handling email and collaboration on demand.