In-Depth

Zooming in on Software Plus Services

Microsoft has given partners a basic field guide to its evolving S+S strategy -- but plenty of details still need clarification.

• By Anne Stuart
• September 01, 2007

(Illustrations by Jason Lee) Some Denver residents must have been mystified by an accessory spotted all over the Mile-High City during Microsoft's recent Worldwide Partner Conference (WPC): lapel buttons sporting the phrase "Nice SaaS."

Inside the Colorado Convention Center, the pins certainly raised the profile of Santa Clara, Calif.-based OpSource Inc., whose employees gave them away by the handful.

But in a way, the buttons' sentiment represents something much bigger than a memorable marketing slogan for OpSource, a Gold Certified Partner specializing in Software as a Service, or SaaS (which -- to anyone for whom the clever catchphrase didn't compute -- is typically pronounced "sass"). It's also a succinct summary of Microsoft's own message about the ongoing evolution in how software is sold, delivered and maintained: "SaaS is coming, and it's going to be great for Microsoft, its partners and its customers."

However, for the better part of two years, that message was almost as cryptic for many Microsoft partners as it was for those understandably baffled Coloradans. While Microsoft officials talked nonstop about how the transition to SaaS would revolutionize its business, the company's overall approach was heavy on vision, light on details.

Until Denver. Microsoft's leaders used the fourth annual Worldwide Partner Conference to share, for the first time, some specifics about what they call "Software Plus Services" (or S+S). The first came in the form of a warning: Climb aboard the Good Ship S+S -- or risk being left behind on the dock.

"I have a lot of partners ask me ... ‘Why are you getting into Software Plus Services? I don't want any part of that. That's a different model than I've used in the past,'" Microsoft COO Kevin Turner told several thousand partners in his WPC-opening keynote. Turner's answer: "Software Plus Services is imminent. It's going to happen ... We'll help you, we'll work with you, but this change is going to happen, and I encourage all of you to make that change with us."

Microsoft CEO Steve Ballmer was even more direct. "I guarantee you Microsoft will lead in driving this next generation of computing and user interface, as we have the last couple of generations of computing and user interface," he told partners. "Priority No. 1 in terms of our long-term outlook is this transformation, and we're going to make sure it's a very successful one for our customers, for our partners and, of course, for Microsoft."

The second clear message: While partners, in Microsoft's view, have few options other than participating in the transition, S+S is really all about providing choices -- for customers. In his high-energy speech, Turner dismissed as "hype" the idea that "everything is going to go to Software as a Service." Instead, he and others said, Microsoft envisions a hybrid model in which customers can choose between hosting software themselves or having another company -- either Microsoft or a partner -- host it for them. "Delivering that choice is what our Software Plus Services strategy is all about, and it's why we differentiate it [from SaaS] in the name," Turner said. "It's about extending our solutions to where the customer wants a choice."

The third clear message: Microsoft says that those choices offer partners plenty of opportunities in areas ranging from the obvious (hosting) to new business models such as syndicating advertising or acting as agents for Microsoft-hosted services. In Denver, Microsoft executives rolled out their S+S partner "framework," essentially a succinct outline detailing the strategy and what the company views as the most significant benefits, options and opportunities. Excerpts from the framework are highlighted in these pages, in what we think of as an early S+S "field guide."

At the same time, there was this final message, with its massive disclaimer: "We're still figuring it out," Turner told partners in closing the WPC. "Next year, we'll be smarter about it than we are this year. And today, we're smarter than we were last year. But we aren't completely, completely at the end of the job on our vision for where we're going with Software Plus Services."

Fig. 1 S+S Framework: Platform   Microsoft says its Software Plus Services approach will combine elements of: Desktop computing Enterprise computing Mobile computing Online computing "The best of all these worlds will define the world of Software Plus Services." -- Steve Ballmer, CEO, Microsoft

S+S Defined -- and Framed
Microsoft's S+S model combines elements from four types of computing: desktop, enterprise, online and mobile. "The best of all these worlds will define the world of Software Plus Services," Ballmer told the WPC crowd.

What's fueling the shift to that model? In a July 2007 white paper laying out its partner framework, Microsoft traces the transition to the recent proliferation of broadband networks and the availability of inexpensive, seemingly limitless data-storage capacity. Because of those factors, "software delivered over the Internet is a logical evolution from the traditional client-based model," states the white paper, "Microsoft Software + Services Partner Opportunity."

But the paper also reiterates the company's dedication to a hybrid approach -- in no small part because that better supports what Microsoft Chairman Bill Gates has called "the digital lifestyle," a scenario in which people have full access to whatever technologies they need or want, wherever they happen to be.

"Every day, it becomes clearer that market demand exists for both on-premise software and hosted services and that such an approach is necessary to deliver the seamless computing experiences home and business users have come to expect," the white paper states. (For more on Gates and the digital lifestyle, see "Defining the Digital Decade," April 2006.)

So today, Microsoft defines S+S as "an additive model that goes beyond packaged software to give customers increased flexibility and choice in deployment options," according to the white paper. Those options include having software hosted "on-premises" at the customer's facility, delivered via the Internet or deployed as "hybrid solutions or ‘mashups' that deliver the best of both worlds by combining hosted services with capabilities that can only be achieved by software running locally on a device with a powerful processor," the white paper says.

Fig. 2 Delivery   Microsoft says that the key word in its Software Plus Services strategy is "choice." Customers will be able to choose from these delivery models, or a combination of the three: Hosted on-premises (at customer sites) Hosted by Microsoft Hosted by Microsoft partners "We think the hybrid model is the wave of the future." -- Marie Huwe, General Manager of Partner Marketing, Microsoft

The Partner Picture
Even with those better-articulated definitions, Microsoft partners might well wonder where they fit into the S+S scenario.

Darren Bibby, senior analyst for global software channel sales for Framingham, Mass.-based IDC, says the messages that Microsoft promoted at the WPC helped strip away some of the abstract fuzziness that had surrounded S+S up to that point.

"Microsoft did a decent job of introducing some concepts" underlying the S+S strategy, Bibby says. "I think a lot of partners could understand it and bought into it. It was good for direction."

But he says Microsoft still needs to provide more S+S specifics to its partners. "A lot of them were probably leaving the conference thinking, ‘That's raised as many questions as it's answered.' If you're an ISV, what does it mean to you? If you're a VAR, is there anything to resell anymore?" Bibby says. "Partners have to figure out which way they need to adapt to take advantage of this."

Of course, many partners also worry about the distinctly unpleasant possibility of competing head-to-head with Microsoft to provide hosting services to customers. Meanwhile, the road to higher revenues by way of S+S remains shrouded in mist. Paul DeGroot, an analyst with the Kirkland, Wash.-based consultancy Directions on Microsoft, sums it up this way: "The really big missing piece in Microsoft's S+S story is how it plans to make money."

Microsoft clearly hopes to provide direction, allay fears and fill in some blanks with its S+S framework. The company has identified nearly a dozen models that it says partners can use to begin generating new business -- and new revenues -- via S+S. Of those, Bibby is particularly intrigued by the advertising opportunity, in which partners generate revenue via advertising syndication, using both pay-per-click and cost-per-impression transaction models.

Fig. 3 Opportunities   Microsoft has identified the following Software Plus Services business models for partners: Advertising Referrals Reselling Hosting Customization/Integration Design/Development Support/Training Consulting "This newest pillar of Software Plus Services is going to open up a whole new opportunity for existing partners to extend their business and a whole new opportunity for new partners to come along and create value in the marketplace." -- Kevin Turner, COO, Microsoft

 

Fig. 4 Monetization   While emphasizing that existing models such as consulting and reselling will still apply, Microsoft also envisions at least three new types of Software Plus Services monetization models for partners: Subscription-based Advertising-based Licensing-based "Partners may choose to adapt their businesses to take advantage of the rapid proliferation -- and market acceptance -- of hosted services." -- From Microsoft white paper, "Microsoft Software + Service Partner Opportunity," July 2007

"Partners can come up with an application and essentially offer it free to customers, then have the revenues made up by advertising," he explains. "It's not that different than in the late 1990s, when everyone was going to build these cool Web sites and get all these eyeballs and pay for it all by advertising."

Microsoft executives cited plenty of products already playing into their S+S strategy, particularly, of course, Windows Live and Office Live. But analysts are keeping their eyes on Dynamics Live CRM, the hosted version of Microsoft's customer-relationship management software, due to launch some time this year. When it does, customers will be able choose from on-site, Microsoft-hosted and partner-hosted versions of the product.

DeGroot notes that Live CRM could cannibalize some of Microsoft's installed CRM software. "That's not a huge problem for CRM, since it doesn't contribute much revenue to Microsoft now and has a small user base. But it's not clear that you can build a big, successful company by converting users of your on-premise software to users of your Internet-hosted software," he says.

As a result, the value proposition for partners remains uncertain, he says: "Because it's not clear how Microsoft will make money here, it's not clear how partners will make money here."

Fig. 5 Benefits   Based on early efforts, Microsoft says the following key benefits are among those that partners can expect from Software Plus Services: Increased revenue Improved profitability More options for customers More predictable business cycles Shorter sales and deployment cycles Faster time to market More recurrent revenues; increased customer loyalty "Look at where [Office Live is] going ... This past year, we were in one country. We're going to five more big geographies this year. So this thing is just starting out, and it's starting to explode." -- Kevin Turner, COO, Microsoft

At the WPC, Microsoft announced an unusual "partner engagement model" for Live CRM; among other benefits, Microsoft will give partners 10 percent of their customers' subscription fees every year, rather than as a one-time bonus. Undoubtedly, some partners "can make more money doing some handholding for customers who want some handholding," DeGroot says, adding, "But Salesforce.com doesn't go around telling partners that there's a great future for them helping their customers implement CRM on Salesforce's platform. The [Live CRM] product is easy enough out of the box for most customers to use without a great deal of customization. I don't see why that wouldn't be Microsoft's goal, and in the process, there's less work for partners."

Microsoft executives weren't shy about admitting, repeatedly, that when it comes to S+S, they don't have all the answers. "We don't have it completely figured out yet," Turner acknowledged on the WPC's final day. "We're well on the way, and we're transforming some huge product lines, but we still have a lot that will continue to evolve over the next few years."

IDC's Bibby calls that "a very honest and realistic" approach. "I don't think it's obvious what the path forward is. I think there are many opportunities, and I think they need to keep their ears open," Bibby says. "By next year's [WPC], they should have some solid answers." Meanwhile, he says, partners should be prepared for change, which will take some time: "The ‘new normal' will be a few years away."

DeGroot agrees: "I just haven't seen anything that looks to me like a real business, at least by Microsoft's definition of the term," he says. "As they struggle to figure it out, there's a risk that there will be some surprises for partners down the road."

In other words: It remains to be seen just how "nice" Microsoft's S+S strategy will ultimately be for partners.