Microsoft wasn't about to get one-upped by Dave Duffield. As the PeopleSoft founder was answering questions yesterday about Workday, his new software-as-a-service company, Bill Gates was expounding on his SaaS vision at a conference in Munich.Microsoft is now offering to its channel partners a subscription licensing model for the Microsoft Dynamics line of ERP applications. The new model is intended to get partners offering Microsoft apps via a hosted service.

But will businesses buy into this idea of Microsoft as both a purveyor of hosted apps and the developer of the big, hefty software that sits on our servers and desktops? Yesterday's subdued announcement didn't have 1/10th the noise we'll get with the upcoming deliveries of Vista, Exchange, and Office 2007. In the SaaS market, Microsoft faces Salesforce.com and now Workday, which don't have big software baggage.

No question that the SaaS sweet spot is small and midsized businesses--companies that don't want to deal with software and likely have a skeletal (or no) IT department. Still, it's a big market. But Microsoft as a hosted software vendor, let alone an ERP vendor? I'm thinking it'll be a tough sell. And I'm not the only one predicting problems.