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Partner Hosting Still Has a Future

Long the subject of benign neglect, the Services Provider License Agreement has been rejuvenated in the last year with significant program changes.

To assess how serious Microsoft is about Software plus Services, the Services Provider License Agreement (SPLA) makes a good index. Long the subject of benign neglect, it has been rejuvenated in the last year with significant program changes, and more change is coming.

The SPLA lets partners resell hosted Microsoft products-hosted Exchange is about 80 percent of most hosters' business -- for a monthly fee. Depending on the product, they pay a monthly fee per processor or per subscriber each month. That's the back-end; at the front-end they may have a different model, offering customers annual subscription packages and the like that conceal the month-to-month nature of their Microsoft billing.

The program emerged out of the "application service provider" (ASP) model that gained some traction in the late 1990s as the Internet and broadband began to become widely available.

The economic advantages of this model take more analysis. The pricing often doesn't pencil out better than buying conventional licenses and hardware. In the early days, Microsoft's pricing under this model was inflexible and not particularly cheap. It didn't work out for everyone and issues like network latency and reliability often tipped the scale toward keeping your software at home.

Nevertheless, hosted services have one huge advantage over running the software yourself, particularly for smaller companies: your first full-time IT employee will cost perhaps $60,000 a year, which works out to about $100 a month per seat in a company with 50 desktops. Spending $10 a month for a hosted package that includes Exchange e-mail, SharePoint collaboration software, Communications Server instant messaging and presence and Live Meeting Web conferencing (like Microsoft's hosted Business Productivity Online Suite, BPOS) starts to look quite attractive if you can delay the day when you need to add headcount.

BPOS is offered directly to customers by Microsoft, but the company hasn't completely forsaken its hosting partners -- as part of the revamp of the SPLA, the company created a similar bundle (with a similar discount from the sum-of-the-components cost) that its hosting partners can sell.

Other significant changes: some price breaks for hosters willing to commit up-front to three years, a welcome change because even a large hoster selling thousands of seats a month was getting roughly the same break on price as a one-person small business buying five Microsoft product licenses; ending the requirement that hosters must use the latest version of the software (although use of older products could sometimes be grandfathered); better pricing for companies that host their own or third-party software running on the Microsoft platform; and an entry-level hosting program called SPLA Essentials. Coming in January: the right for ISVs to use volume-licensing software -- with its much-better discounts -- to host their products for customers.

Let's add this up. Between Microsoft Online and Windows Azure, it looks like Microsoft is making a major play in hosted services. But the changes to the SPLA suggest that Microsoft doesn't want to leave its hosting partners hanging.

The reality is that Microsoft cannot ramp up its hosting capabilities enough to serve all the potential demand. Furthermore, unlike selling licenses, hosting has costs, like ongoing data center power, hardware and management expenses.

When partners do the hosting, however, Microsoft is back to the immensely profitable business of just selling licenses. The partner buys the hardware, builds and operates the data center, and sends a monthly check to Microsoft. That's a good reason to keep hosting partners competitive -- they have far more feet on the street than Microsoft does, and Microsoft still realizes a hefty profit margin. Yes, it cannibalizes the on-premises software business, but that business is already in some danger as both the technology and a tough economy -- in which hosting can preserve cash flow-buff up hosting's advantages.

Next Time: Mortally Wounding LARs

About the Author

Paul DeGroot is principle consultant with Pica Communications, which provides consulting services for customers with complex Microsoft licensing issues.