Directions

Competing and Cannibalizing

When Microsoft wades into a market with an inexpensive, global solution with the weight of its vast partner community behind it, everyone else often heads for cover.

• By Paul DeGroot
• May 01, 2010

When Microsoft wades into a market with an inexpensive, global solution with the weight of its vast partner community behind it, everyone else often heads for cover.

There's a problem when you're Microsoft, however. Some of those "everyone elses" are Microsoft partners, and kicking them out of the market could reduce the market share gains from getting into the market directly.

I'm referring specifically to hosted servers, like Exchange and SharePoint Online, where Microsoft wants to meet the threat from competitors like Google. Why is Microsoft competing with its partners? Partners do have a role in hosted servers, but prices are low, partner commissions are consequently sparse, and Microsoft owns the customer relationship.

There are good reasons for Microsoft to get involved directly. First, large companies want to work with a large hoster, someone with deep pockets who can afford to provide the continuity they require. Now, this may be an illusion -- the Microsoft service uptime may be no better than that of many smaller hosters -- but it's an illusion that large organizations like to have, about both themselves and their business partners.

Second, redundancy is important, and with more than a dozen huge data centers around the world, Microsoft offers that. It's still not enough in some cases -- notably, many government agencies and some public corporations will not permit their data to be hosted outside national boundaries, which dictates that a hoster needs at least two data centers in a country to offer both redundancy and location. But smaller players who are big fish in their local ponds may be in a better position to do that than a company like Microsoft -- they may own most of the rare data center operations talent in a small country.

Third, having a software vendor back the hosted service puts responsibility clearly on the shoulders of one party. If Microsoft-hosted products fail to perform in a Microsoft-hosted data center, we know who owns the problem. However, that doesn't guarantee that there won't be problems, or that they'll be quickly resolved. Just ask one of the partners who banged futilely on the Microsoft-built and Microsoft-hosted Volume Licensing Service Center for several months last winter.

Who is most likely to be affected by Microsoft's efforts to gain market share for hosted services? I'd argue that the company may gain more market share at the expense of its partners than at the expense of a competitor like Google.

Take a company like Intermedia, which says it has 375,000 hosted Exchange seats and 5,000 partners. Microsoft claims 1 million hosted Exchange seats and 7,000 partners, but a lot of those seats are for the Dedicated service, which isn't sold through broad partner channels and requires a minimum of 5,000 seats. It's quite possible that in the small to midsize business (SMB) market, Intermedia and other large hosters (groupSpark and Rackspace, for example) host more Exchange seats than Microsoft does. They also offer more generous partner margins (as much as 40 percent, compared to 6 percent to 18 percent from Microsoft) and preserve the partner-customer relationship with partner-branding opportunities.

One of Intermedia's responses to competition from Microsoft has been to expand, with offerings like Unison, which includes the services that Microsoft hosts -- e-mail (including mobile synchronization), chat, presence, contacts and calendars -- but also telephony, via a soft PBX on the customer's premises, and an Outlook-like client on each desktop. It costs more than Microsoft online services, but it also provides more. Microsoft has yet to venture into telephony, an area where small businesses pay some of their largest bills.

The catch: Unison runs on Linux.

That may be part of the survival story for Microsoft hosting partners: a lower cost but higher value solution that doesn't involve monthly fees to Microsoft. But it provides no net benefit for Microsoft. The risk Microsoft is taking by competing aggressively in hosted services is that its own partner channel may be collateral damage, costing the company one or two seats for every one or two that it gains.