Microsoft fleshes out Software + Services vision

Warren Wilson, Research Director

Microsoft has announced a number of new offerings and initiatives that flesh out its 'Software + Services' (S+S) strategy in a bid to 'one-up' software-as-a-service (SaaS) providers by treating on-demand services as an extension of, not a replacement for, traditional client-server solutions. The announcement serves as both a progress report on the S+S strategy and a roadmap for future offerings. Although many questions remain, especially around delivery dates for those future offerings, the announcement signals to the market that Microsoft isn't standing still in the face of stiffer SaaS competition from the likes of salesforce.com, SAP and Google. It also signals that, rather than simply following the SaaS trend, Microsoft is aiming to go one better than SaaS providers with hybrid solutions that give customers more choice and flexibility - while protecting its client-server investment.

Microsoft announced plans to deliver a range of new solutions grouped in two 'families,' called 'Live' and 'Online.'

Live offerings are positioned mainly as web-based extensions of, or enhancements to, client-based applications, and aimed primarily at individuals, employees and workgroups. Soon to join the 'Live' line-up is Office Live Workspace, which will give people online access to Office documents and collaboration tools, and to the Office applications installed on their PCs. Microsoft is currently enrolling people in the beta program, but hasn't specified when that will begin, or when it will offer a 'finished' Workspace service.

The 'Live' label entered Microsoft's lexicon in November 2005 with the launch of Windows Live (which includes Live Hotmail, Live Search and Live Messenger, among other services) and Office Live, newly re-branded as 'Office Live Small Business.' Office Live Small Business provides small businesses with a free domain name, website and email accounts; subscription-based applications such as customer, project and document management; and a more sophisticated, Microsoft-managed website.

The other family of offerings, called 'Online,' consists of three new standalone, Microsoft-hosted offerings - SharePoint Online, Exchange Online and Communications Online - that are aimed at large organizations and can take the place of on-premise solutions. They became available on October 1 to customers who buy subscriptions for 5,000 seats or more. Similar functionality has also been available in traditional, on-premise solutions (SharePoint Server, Exchange Server and Live Communications Server), and on a subscription basis from Microsoft hosting partners.

Microsoft also introduced an update to BizTalk Services, cloud-based services that aim to help companies connect disparate business systems and create composite applications more easily. Positioned as extensions to BizTalk Server, BizTalk Services have been in trial mode for several months, but are not yet generally available. Microsoft says it plans to announce pricing and licensing terms by the end of the year.

Another element of the recent announcement is the creation of Exchange Labs, where Microsoft will work with large organizations to develop next-generation hosted messaging and unified communications offerings. Microsoft is working initially with select universities and school districts because of their combination of scale and digitally savvy users.

Microsoft also announced that it has launched an early-access program for Dynamics CRM Live, based on the next-generation, multi-tenant 'Titan' platform, and that it will offer the service to paying customers in the first half of 2008 - although not by the end of this year, as it had projected earlier.

A pre-Titan version of Dynamics CRM is currently available for on-premise deployment or on a subscription basis from any of numerous Microsoft hosting partners. The partner-hosted version isn't a good long-term solution, however, partly because its single-tenant architecture makes it less profitable for partners than one that supports multiple customers on a single server.

Inconsistent naming, but shrewd strategy

We find the 'Live' and 'Online' naming conventions somewhat confusing, as they sometimes denote the type of offering - client-server extension vs. complete hosted solution - and sometimes the target audience: 'Live' for individuals, workgroups and small businesses vs. 'Online' for large organizations.

A case in point is 'Dynamics CRM Live.' The Live name makes sense from a target audience perspective, because it is aimed at small and medium-sized businesses and isn't subject to the 5,000-seat minimum like the new Online offerings. On the other hand, Dynamics CRM Live is a complete, hosted solution, like the new Online offerings, and unlike the cloud-based Office extensions that will make up Office Workplace Live. By that logic it should be renamed 'Dynamics CRM Online.'

Another case in point is the update to BizTalk Services. As an extension, rather than a standalone application, it would seem to fit under the 'Live' umbrella. But the application it extends - BizTalk Server - is clearly an enterprise infrastructure application, not one aimed at individuals and workgroups. In announcing the update, Microsoft didn't place it under either umbrella - deftly avoiding an 'incorrect' classification, but leaving it as something of an orphan in terms of the new brand nomenclature.

Apart from confusing naming conventions, we think Microsoft has been fairly shrewd in devising a strategy that embraces both cloud-based, on-demand services and traditional on-premise solutions - a strategy that has allowed it to straddle the fence, experimenting with the new model while still nurturing its mainstay. After all, Microsoft, its partners and its customers all have a lot invested in on-premise software, and this model still has numerous strengths (e.g. performance, reliability, offline availability and deep customization). However, Microsoft obviously can't ignore the new model either, given both its inherent advantages and the success of key proponents like salesforce.com and Google.

From the beginning, Microsoft's S+S strategy has reflected this ambivalence. Although it has had some success with standalone, cloud-based applications (e.g. Hotmail), its emphasis has been on services that extend, rather than replace, on-premise software. Only now is Microsoft close to launching a self-hosted enterprise solution, Dynamics CRM Live; it has taken this long for the vendor to build a platform capable of supporting on-premise and cloud-based software on an equal footing.

Microsoft has so far resisted offering a fully online version of Office - even as Outlook Web Access demonstrates how closely the online experience can mimic that of a locally installed client, and as some competitors (notably Google Apps) offer cloud-based alternatives to Office. Obviously, Microsoft doesn't want to choke the Office cash cow any sooner than it has to. Neither can it wait too long to counter an emerging threat, as it did with the Internet in the mid 1990s. Therefore, the watchword is 'so far' - it will be interesting to see how long Microsoft continues to straddle the fence, how aggressively it protects its current franchise, and how much market share its competitors can gain before it feels compelled to follow their lead with a productivity suite that is fully cloud-based.

Uncertainty for partners

Although fundamentally sound, the S+S strategy nonetheless raises a number of questions for partners who will be critical to Microsoft's success with S+S, as they have been in every other facet of its business.

The vendor is counting on S+S to expand its partner pool by creating a variety of value-add opportunities, some based on traditional models such as resale, implementation and consulting, others based on advertising, referral, hosting, design and development. We agree that the overall market is likely to grow substantially. However, it was clear at Microsoft's recent worldwide partner conference that individual partners feel a lot of trepidation about the new model. They wonder if partners stand to make as much money in a services-based environment than they do today. They also wonder how rough the transition will be, even if the long-term prospects are good.

Microsoft has begun reaching out to partners, offering examples and case studies that illustrate the variety of ways in which they can potentially add value in a services-oriented world. However, the effort is in its early stages. For the moment, partners are relying largely on Microsoft's track record to justify confidence that it will provide the training, co-marketing and other types of support they'll need to make S+S a mutual success.

Warren Wilson leads Ovum's research on dynamic application ecosystems, through which he tracks and compares the ecosystem strategies of major enterprise software vendors. Warren closely examines key trends, innovations and success factors across a broad range of potential ecosystem partners, including ISVs, developers, resellers, consultants and integrators, and hosting and service providers.