As the saying goes, Microsoft will rob Peter to pay Paul.
Today, at its Worldwide Partner Conference, Microsoft announced pricing and partner compensation for its suite of Online Services. The venue is somewhat surprising, because Microsoft-hosted services directly compete with similar offerings from its partners. Microsoft's solution: Cut in partners on the action.
In a Google world of free services supported by advertising, Microsoft's competitive response options are limited. Microsoft doesn't have a successful enough search and advertising platform to compete with Google in free services such as Docs; there is too much risk of hurting sales of desktop and server products such as Exchange Server and Office; and Microsoft is dependent on a large network of partners to sell its wares. There are few giveaway options.
Microsoft's compromise is to offer services cheap, while compensating partners. It's a risky move, because channel conflict is inevitable. Microsoft can coat this bitter pill in sugar, but the taste lingers: The company is directly competing with its partners.
The company's first Online Service is called the Deskless Worker suite. Ala carte offerings for "light" online versions of Exchange or SharePoint cost $3 per employee per month. The whole Business Productivity Online Suite—hosted Communications, Exchange, Live Meeting and SharePoint—is $15 per employee per month. The math looks good for Microsoft and its customers. A company with 50 employees would pay $750 a month or $27,000 over three years, which is a typical time period for Microsoft volume-licensing contract with Software Assurance.
My initial response to the pricing, without doing a hard volume-licensing comparison, is positive. But Microsoft still charges quite a bit more than does Google for Apps, which are $50 per user per year. Microsoft's suite is $180 per user per year, assuming there are no hidden discounts or other devil-in-the-details considerations.
Microsoft gets recurring revenue from real subscriptions, not just volume-licensing commitments. Customers get hosted services from Microsoft that are in some ways better than packaged software. Microsoft takes on the administrative and technical burdens, which conceptually would reduce staffing and other IT Management costs. You can buy a home, or you can rent. If you rent, the landlord assumes responsibility for maintenance, upkeep and taxes. Microsoft is going into the IT landlord business.
But Microsoft has a problem: Its partners, whom Microsoft relies on to sell and service its products. The company has no large, dedicated sales force. Microsoft can't afford to piss off its partners. Microsoft Online Services compete with partners, whether they're selling or servicing on-premise software or selling their own hosted services using Microsoft partners.
Microsoft is trying to alleviate partner conflict by cutting them in on the action. Partners selling Productivity or Deskless suites will get 12 percent of the first-year contract, plus 6 percent of subscription fees. So, first-year bang is 18 percent. The aforementioned 50-seat example that could work out to $1,620 for the first year. I say could, because the devil is in the details with respect for what Microsoft accounts for when. Regardless, that's recurring revenue for the partner. In this scenario, $540 per year ($45 a month) from the subscription's second year.
Is that compensation model enough to alleviate channel conflict? Ideally, customers would still require something on the desktop, meaning Office and Windows. So there is real software that partners could sell and service. But the big money is on the server, and Microsoft would take away from some partners recurring service and maintenance fees. The hosted service kickback fees wouldn't make up for them, not for truly successful partners. Channel conflict is inevitable.
Should Microsoft be blamed for competing with its partners? Yes and no. The "yes" is Microsoft's over-dependence on the partner model. This isn't the first time Microsoft had to kick back money to partners, simply to avoid competing—or just the appearance of competing—with them. Best example: volume licensing, which technically should be a direct relationship with customers, but Microsoft cuts in partners. It's hush money. Don't complain. Be happy.
The "no" acknowledges a changing marketplace. Competition from Google and other Web 2.0 platform companies is real. There has to come a point where, say, Google's online suite, including Calendar, Docs and Gmail, is good enough for many businesses to stop buying Office. Increasing mobility—the need for informational access anytime, anywhere and on anything—creates a clear future for hosted software, whether done by the enterprise, Microsoft or one of its partners—or coming from competing, ad-supported or lower-cost products. Change is inevitable, too.
These changes affect the partner model by commoditizing some of the products and services they offer today. From that perspective, Microsoft is being generous to its partners. Microsoft is adapting its business to a changing computational marketplace, and it's cutting in partners on a piece of the action. It's adapt or die. If you're a dinosaur, extinction is inevitable.
