January 10, 2000

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Microsoft's ASP Strategy: What Is It?
By Aaron Ricadela

icrosoft is investing regularly in companies that deliver software as a service, but its strategy for maneuvering into the ASP market is hard to decipher. The company's $10 million investment in midmarket application service provider Corio Inc. follows investments in Qwest Communications, USWeb/CKS, and Winstar Communications. Small-business infrastructure vendor CenterBeam Inc. is in line for additional funding next week.

Microsoft's ASP Investments
Company	Amount/Date of Investment	Plan
Corio	$10 million/January 2000	Will roll out applications based on Microsoft platform
Winstar Communications	$250 million/Dec. 1999	Will host Microsoft Office and other apps
Data Return	$5 million/November 1999	Developing scripts to let other ASPs quickly configure Windows servers
USWeb/CKS	$67.5 million/September 1999	Co-developing a platform for delivering hosted Windows 2000 applications
CenterBeam	Undisclosed/August 1999	Will host network-and application-management software for small businesses
Concentric Network	$50 million/June 1999	Will co-develop and host Windows apps
DATA: INFORMATIONWEEK

Yet Microsoft partners and industry analysts say the vendor's ASP strategy is still in flux, and Microsoft will be hard-pressed to adapt its software for an emerging, Internet distribution channel. The vendor faces two challenges: turning its Windows operating system, SQL Server database, and infrastructure products into a capable-and profitable-platform for hosting companies, and figuring out how to rent its software suites without jeopardizing sales. Office and its associated developer tools yielded $8.82 billion in revenue during Microsoft's 1999 fiscal year ended June 30, accounting for 45% of total sales. Overall, the company takes about 39% of its revenue as profits. If the ASP market consolidates, as analysts predict, those margins could fall.

So far, Microsoft's forays into the ASP market appear stuck in neutral. An executive at one ASP working closely with Microsoft calls the vendor's commercial licensing pilot program for Windows and BackOffice products "still limited, and still not baked."

Microsoft charges the ASPs in the program monthly fees for its client-access licenses without volume discounts, so the executive gets his Microsoft products through a less-expensive reseller. "What it says to me is they still haven't figured out commercial licensing," he says.

Microsoft refuses to reveal the prices it charges ASPs or commit to a preferred subscription model, but sources say it charges $20 to $25 monthly for each Office seat an ASP needs to rent the hosted Office Online suite. That works out to about $300 per desktop annually for end users. Microsoft Office 2000 Professional edition carries a retail upgrade price of $349.

Office Online also runs on Windows Terminal Server, so users must install a relatively fat client that costs more to administer. Analysts say a truly Web-enabled Office probably won't arrive for another two years.

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