In-Depth
Microsoft Takes Surface and Its Cloud Mainstream at WPC 2015
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Ever since Microsoft started talking about a "Devices + Services" strategy nearly three years ago, partners have been clamoring for a way to get involved.
Yet the devices, mostly in the form of the Microsoft Surface Pro, were tantalizingly out of reach for most of the channel. Even as Microsoft endured public struggles to gain share for its distinctive two-in-one half-tablets/half-laptops, only a handful of high-volume partners earned permission to sell them. Partners grumbled that Microsoft could do better, much better, if more partners could get involved.
A similar dynamic existed on the services side. Since the earliest days of the Business Productivity Online Suite (BPOS), partners lobbied for the chance to bundle Microsoft cloud offerings like BPOS (later Office 365), Microsoft Azure and Dynamics CRM Online with their own and third-party services to present a single solution with a single bill to their customers. Microsoft belatedly began rolling out Open Licensing options for partners to use to bundle the cloud suites over the last few years, but the integration remained complicated.
At the Microsoft Worldwide Partner Conference (WPC) in Orlando this month, Microsoft will give partners what they've been requesting for years. In an exclusive interview, Microsoft Channel Chief Phil Sorgen told Redmond Channel Partner magazine that the broadest channel distribution programs yet will be rolled out at the WPC for the Microsoft Surface and the Cloud Solution Provider program.
Surface Channel To Jump From Hundreds to Thousands
The Surface tablets first shipped in October 2012 when Windows 8 launched. In the nearly three years since then, Microsoft has very gradually and cautiously broadened the device's distribution channels.
First, the Surface RT was only available on the Microsoft Web site and in Microsoft Stores. Next a few retailers like Best Buy and Staples got access. In the middle of 2013, a Microsoft Devices Program arrived in the United States with distributors Ingram Micro, Synnex and Tech Data Corp. providing Surfaces to 10 authorized resellers. By May 2014, that had expanded to 100 Authorized Device Resellers in 31 countries. In the year since, the number of participating resellers expanded both within countries and to more geographies.
"I've always said that we were taking a phased and measured approach to developing the channel for Surface," Sorgen says. When it came to limiting channel access to the Surface, Microsoft executives over the last few years have frequently cited Microsoft's own need to gain internal experience and institutional comfort in manufacturing, shipping and supporting Surfaces in increasing quantities before trusting themselves to turn the devices over to the channel for full-scale sales.
Those quantities have been picking up. Driven partly by sales of the breakout Surface Pro 3 device, Microsoft had two quarters this fiscal year in the neighborhood of $1 billion in sales. For the first nine months of Microsoft's fiscal year, ending in March 2015, Surface revenues are up 53 percent over the year-ago period. While the quantities aren't in Apple iPad territory, they've been respectable for a higher-end device. Microsoft hasn't released unit shipment numbers, but for the most recent holiday quarter, Pacific Crest analyst Brendan Barnicle estimated that Microsoft shipped 1.275 million units at an average selling price of $863. Microsoft's opacity means outside observers argue about whether Microsoft is actually making money on the Surface when marketing and advertising expenses, such as the $400 million promotional deal with the National Football League, are taken into account. Nonetheless, it's clear Microsoft has come a long way from the $900 million writedown and steep discounts of the summer of 2013.
"We continue to see momentum and excitement for Surface. There have been great additions to the Surface portfolio this year and great experience with our channel partners, and candidly, we've been somewhat humbled by the interest in Surface that we're seeing both from our customers and the channel. As a result of this momentum, we're ready for the next step," Sorgen says. "With the help of our distribution partners, we're going to grow the opportunity for more partners to sell Surface. Today the number of resellers are a couple hundred. We're taking it to a few thousand globally."
That broader access to the ability to resell Surface devices to customers will take the form of links that will go live on the Microsoft Partner Network (MPN) Portal on the first day of the WPC. At the site, partners will be able to get more information, find Surface distributors in their markets and start signing up.
"The next group of partners are going to be ones that would fall into our VAR channel that have traditionally had success selling to commercial," Sorgen says. Microsoft is especially eager to recruit partners "that are bringing together the devices that are representing the mobile scenarios that our customers are pursuing and ideally bringing that together with the cloud offerings and the cloud capabilities," he says.
Distributors have played a big role in Surface sales to date and will continue to be Microsoft's main contact point even in the broader push. "We will lean extensively on our distribution partners, who have direct experience in understanding the capabilities both in sales and servicing their respective customer base. So we'll be working closely with them for the selection criteria, as all of them will be authorized through the distributor channels," Sorgen says.
Clearly, Microsoft's timing for an expanded channel push is about more than getting attention at the WPC. With general availability of the Windows 10 OS set for July 29, partners will be able to sign up for the program and turn around immediately and start selling Surface Pro 3, which will support the new OS.
"We'll be looking for a lot of those [Surface partners] to come along with us on the Windows 10 journey, as well," Gavriella Schuster, general manager of the MPN, confirms.
On the unconfirmed side, new Surface sales partners might also have a Surface Pro 4 to take to customers around the time of the Windows 10 release. In the past, Microsoft has introduced a new Surface Pro every eight months since the original February 2013 release. Microsoft is slightly overdue for a version 4, and the industry rumor mill is churning about the potential features for the product.
In a blog entry nearly two years ago, Forrester Research Inc. senior analyst Tirthankar Sen argued that Microsoft's go-slow approach was probably the correct one at the time as the software vendor tiptoed its way into the business hardware market. But the analyst also contended that Microsoft would need to broaden its channel in order to start generating real volume for the Surface. His blog described the outlines of the channel opportunity in a way that still applies two years later.
"Microsoft should ultimately focus on creating an ecosystem of partners (distributors, resellers, ISVs, SIs) that can add value to Surface, including the delivery of integrated solutions to enterprise customers," he wrote. "Solutions can include vertical-specific applications, scenario or use-case-specific security features, collaboration features, etc., preloaded or customized for the device/organization.... Microsoft will eventually need to open the market to a larger base of partners, including its solution providers. This is critical for expanding geographic reach and targeting the enormous base of midmarket and SMBs while also driving increased value by bundling the Surface with business solutions."
Cloud Solution Provider 'Goes Mainstream'
If the term Cloud Solution Provider (CSP) sounds familiar, there's a good reason for that.
John Case, corporate vice president of Microsoft Office, unveiled the CSP on the main stage at last year's WPC in Washington, D.C. "This is a true cloud reseller program," Case said at the time. "Partners in the program will be able to directly provision customer subscriptions and provide one monthly bill for partner services and Microsoft services together. You can also directly manage these customers with things like the Partner Admin Center, and you'll own the tech support relationship."
"For us, this capability is a major step forward in working with you on taking our businesses to the cloud to customers," said Case, who painted a broad-brush picture of the program in that 2014 keynote. Case will take the WPC main stage again this year to provide some of the finer details that have been hashed out or implemented over the last 12 months.
"At WPC a year ago, we introduced [CSP] in a very limited way. We had a very narrow selection process," explains Sorgen.
Then the program covered 48 countries. Now it covers 131. Then the program involved Office 365 and Microsoft Intune. Now it covers Azure, Dynamics CRM Online and the Enterprise Mobility Suite (EMS), as well.
At a more fundamental level, the program is getting broader, too. A few months after the WPC, Schuster wrote a blog post laying out the two-tier structure of the CSP, although it's actually slightly more complicated than that.
The initial partners, and most of the partners to date, are Tier 1. That tier is reserved for a very specific type of partner that won't make up a large percentage of the partners in the CSP. "Tier 1 is really about capability," says Sorgen. "Those five capabilities are ability to bill, ability to provide the 24x7 support, the ability to do the technical integration, the ability to manage customer lifecycle management and having the right business model around managed services IP. If you meet those five capabilities, you're a great candidate for Tier 1. For everybody else, we will enable distribution to provide any of those gaps so everybody else will participate in Tier 2 to serve their customer needs."
As with the Surface, Microsoft worked over the last year to authorize Tier 2 distributors who will distribute CSP to their customers, who are also Microsoft partners. That combination of distributors and their partner-customers make up Tier 2.
"While we made those authorization decisions over the course of the year, we will actually go fully live with Tier 2 in our next fiscal year. That will really launch at WPC," Sorgen says. "So CSP really goes mainstream."
By number of partners, Sorgen says, "We think we'll go well beyond the hundreds today to more than 1,000-plus of Tier 1 over this next fiscal year as we add Azure, as we add CRM Online and EMS to the mix, as well as the APIs to allow them to do all of the integration in an automated way. It won't be tens of thousands in Tier 1. That's why we have a Tier 2 model. That's why the distributors that we've authorized will provide that layer. They'll provide the support capability. They may aggregate specific applications that enhance our cloud platform, and they may provide them some of the capabilities to provide a managed services offering."
Those participation expectations aside, Sorgen emphasizes that there are no program quotas. "We don't have a magic number. We don't have a target for x number in Tier 1 or x number in Tier 2. Tier 1 is really about capability," he says. "For everybody else, we will enable distribution to provide any of those gaps so everybody else will participate in Tier 2 to serve their customer needs."
The tiered approaches to Surface and to CSP are big changes for the MPN. For the first time, any Microsoft partners from the smallest to the largest should be able to sell Microsoft's devices and services in a way that fits their business models.
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