Will the BPOS Price Cuts Hurt Partners?

Some partners worry that Microsoft is undercutting the value proposition of Exchange, selling below cost to fend off Google.

As Microsoft seeks to extend its platform to the cloud, the company continues to hit some turbulence.

Just as Microsoft was slated to launch its Windows Azure cloud services at last month's Professional Developers Conference in Los Angeles, Inc. swooped in and slashed the cost of its services by up to 15 percent. Amazon also added a relational database hosting service, a feature that makes the cloud more attractive for enterprise applications and one that Microsoft is readying as well.

Meanwhile, in another major blow to Redmond, the City of Los Angeles in late October chose Google Inc. to run its online e-mail service. It was a closely watched competition between Microsoft and Google for a city-wide government network.

In an apparent response that has some partners furious, Microsoft last month slashed the price of its Business Productivity Online Suite (BPOS) from $15 a month to $10 a month. Some partners are even accusing Microsoft of offering BPOS below cost. BPOS consists of hosted collaboration and communications software based on Microsoft Exchange Online, SharePoint Online, Office Communications Online and Office Live Meeting.

"What Microsoft has done by design or by negligence is everything they can to cut the VARs out of the economic equation, by offering the solution at such a cheap price that it devalues the solution and creates a business model where the reseller has no control of the customer," says Bob Leibholz, vice president of business development at New York-based Intermedia, a Gold Certified Partner.

Not Too Happy
With 420,000 e-mail subscribers, about half of which have full Microsoft Exchange licenses, there's a lot at stake for Intermedia. The company has hosted Exchange for nearly 10 years and is also the hosting provider for a network of 4,000 of its own solution providers offering the service and premium offerings including Office Communications Server. Among those solution providers is Scottsdale, Ariz.-based 4SmartPhone, and CEO Patrick Gilbert is not too happy with Microsoft's latest move.

Bob Leibholz, vice president of business development at Gold Certified Partner Intermedia, believes that Microsoft "has cut VARs out of the economic equation."

"Microsoft positions itself even more now than before as a competitor to its own partners, but this time doing it in a way that amounts to dumping -- from my standpoint selling below costs," Gilbert says. "In essence, they're almost saying the license that they still charge us a significant premium for is worth nothing; or it's at least worth nothing to them."

Leibholz is fuming, saying Microsoft is looking to undercut its partners. When a customer signs up for BPOS, they have the option of signing up directly with Microsoft or they can choose a partner, but it's not required, Leibholz explains. Even if customers do choose a partner, they can change their preference at any point. "They can basically deprive the partner who brought and closed the deal, with whatever little margins they were making," he says.

Those that bring in BPOS deals receive a 12 percent signup fee and 6 percent of recurring revenues. Leibholz believes Microsoft's move is an act of desperation in reaction to LA choosing Google. Despite announcing new customers such as Aon Corp., Lion's Gate Entertainment, McDonald's and Tyco Flow Control, among others, Leibholz says Microsoft has had a hard time selling BPOS seats of its own.

"Their BPOS and Exchange Online offering has been a sheer, unmitigated disaster," Leibholz argues. "What they've done is, they lumped in all sorts of deals that would have been formerly called managed services deals onto the BPOS moniker and, essentially, recounted the same seats as BPOS, when, in fact, the natural growth rate of BPOS for small and medium businesses is on the order of 30,000 mailboxes. For an investment of close to a billion dollars, that's not a very good ROI. The biggest implication of this is that Microsoft sees far less value in Microsoft partners now than they did before, and this is another manifestation of that decreasing value."

Microsoft declined to comment at press time, although Leibholz says he believes Microsoft is looking at some sort of solution. However, some partners believe Microsoft's new pricing could actually draw more customers for them.

"If this helps with adoption, then I'm OK with it," explains Todd Golden, co-founder of PointBridge, a Chicago-based BPOS partner that has earned first-year annual revenue of $640,000 from the service.

"Certainly it has an impact on the partner-of-record fees, but I don't view this as something that's going to hurt the [System Integrator] partner community." The way Golden sees it, those partners who try to compete with Google or Microsoft on price alone are going to face an uphill battle.

PointBridge earns revenues with BPOS through the professional services it offers by providing migration and maintenance services while also integrating Exchange with SharePoint and Office Communications Server.

"It might actually accelerate some projects for us because the primary barrier to entry, which is the ongoing subscription fee, goes down for customers," he says, "so that ongoing operating expense is lowered, and that makes it more attractive for customers."

About the Author

Jeffrey Schwartz is editor of Redmond magazine and also covers cloud computing for Virtualization Review's Cloud Report. In addition, he writes the Channeling the Cloud column for Redmond Channel Partner. Follow him on Twitter @JeffreySchwartz.