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5/21/2008
10:42 AM
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Despite Challenges, Microsoft Expects Broad Adoption Of Online Software Services

Microsoft expects half of all Exchange e-mail customers to subscribe to a software-as-a-service version within five years.

Slowly but surely, Microsoft is ramping up its software-as-a-service efforts for businesses of all sizes. As more of its services hit the Internet, Microsoft expects broad adoption over the next few years. But that won't come without some hard work and overcoming a number of challenges.

Microsoft expects half of all Exchange e-mail customers to subscribe to a software-as-a-service version of the software within five years. The company recently signed an 80,000 seat deal for Office Communications Server Online with an undisclosed customer and earlier this year signed one with Coca-Cola Enterprises for 35,000 seats of several Microsoft Online services, though that deal could grow to 70,000.

But the company's just at the beginning of a much larger mission that poses a number of potential stumbling blocks. Chris Capossela, senior VP of Microsoft's information worker product management group, says the services era marks "chapter 3" of Microsoft's history, after Microsoft's initial push into the PC market and subsequent quest for dominance in the enterprise. "It'll be our great challenge to build this new business for us that's all based on services on the cloud," he said in an interview.

Much of the initial interest in Exchange Online is coming from IBM Lotus Notes users looking to upgrade or switch out their old e-mail software for Exchange, so much so that Microsoft's made a bit of a sales campaign out of it. The way Microsoft sees it, it's easier to switch from Notes to Exchange Online than it is to switch to the on-premise version of Exchange, and a lower barrier potentially translates to better conversion rates.

But moving to online services isn't nearly as easy as many companies think, according to Ron Markezich, vice president of Microsoft Online. "It actually exposes any sins of the past in your environment," he said. "It forces you to say, 'Hey, is my directory cleaned up, is there consistency with archiving?'" Microsoft provides admin tools for doing things like setting up authentication, but has to provide help with some of the heaviest lifting like federating one company's Office Communications Server Online with another's Lotus SameTime instant messaging systems.

Eventually, Markezich said, Microsoft's integration work could lead to the release of a product that analyzes and troubleshoots the configuration and schema of Active Directory. That could be something that even helps customers who aren't using Microsoft Online services.

Microsoft partners will likely do the tough integration work in the future, potentially providing Microsoft a chance to save face with partners, many of who Markezich said reacted strongly and negatively to Microsoft's initial software-as-a-service plans since there's big business in hosting applications like Exchange and SharePoint. Other new opportunities for partners should include things like training and customization.

Pricing is another sticky spot for Microsoft. Subscription costs for Microsoft Online services will generally likely average out over time to be more expensive than licensing fees for their on-premise counterparts. But Microsoft will still see its margins shrink online because of its own higher costs to host the software. Overall, according to Microsoft, companies will save because their operational costs will be significantly lower.

The company will cut prices for customers if they subscribe to the entire suite of its collaboration services (Exchange Online, SharePoint Online, Office Communications Server Online and Live Meeting) to encourage customers to subscribe to all of them. The company also plans to have two levels of service, one for "deskless" workers who need less functionality and another for information workers who might like more.

Despite lower margins, Microsoft anticipates it can eventually use services as a way to increase market size and share. "Because it's easier for a customer to use the software, you can actually sell more services," Markezich said. "There's a huge number of workers that are unserved by technology, and this gives an opportunity to do that."

For example, he said Microsoft estimates only 60% of all employees have a corporate e-mail address, and services could allow all of them to have one because the barrier to entry is lower. He added that software delivered as a service rather than in a downloadable package or a CD acts as a strong piracy deterrent, and that could increase sales figures as well.

Microsoft will offer a dedicated service for larger customers who want to have more control over whether their software gets upgraded and a better sense of security in that no other companies will be accessing the servers they use. It also will offer a multi-tenant service that will be cheaper.

Striking the right balance of customizability and consistency is important even for multi-tenant customers, according to Capossela. "Regardless of whether you're running it yourself or someone else is running it, there are things you're going to want to configure," he said. "You don't want to essentially have to tell every employee, okay, go to Hotmail.com and sign up for e-mail." In fact, Microsoft briefly tried that in pilots before launching Exchange Online. Customers will need to be able to integrate Active Directory, set policies to add disclaimers to the bottom of e-mails, or set up walls so that certain employees can't e-mail one another.

Another major challenge for Microsoft, especially in an increasingly global technology market, will be regulatory interference. "The rules weren't written for online services, and some countries are going to be left behind," Markezich said. For example, telecom laws in some countries make it impossible for Microsoft to sell Live Meeting there. That's one of many reasons Microsoft will keep its on-premise products as options for the foreseeable future.

Microsoft plans to announce more a more detailed business services roadmap at its Professional Developers Conference later this year. Eventually, as the company moves forward with its plans, Markezich's group, which used to oversee sales, operations, engineering and support for all Microsoft Online services, will slowly fade away as those teams merge with various product groups.

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