Will Google Disrupt the Microsoft Channel?
Microsoft is usually the one to beat. But we're talking search, so this means Microsoft is looking up to a larger foe in Google.
The scope of the battle is not existential, like the Microsoft-Netscape Communications Corp. smackdown that doomed Netscape to stumble until it fell, exhausted, into the arms of AOL Inc. Instead, it's likely one of those battles that ends with the loser highly successful by all measures, but less relevant. Think of the IBM versus Microsoft fight that played out over the battleground of Windows versus OS/2 in the early 1990s.
How Microsoft comes through this fight is not just relevant to the 88,214 people working in Microsoft offices worldwide. It also matters to the estimated 600,000 partner organizations engaged with Microsoft globally and their multiple millions of employees. Will that channel remain largely intact or be fundamentally disrupted as the two giants struggle to control the potentially lucrative productivity and collaboration applications market in the cloud?
A Battle with Many Fronts
While Google and Microsoft are competing in many areas, the main battle is clearly in search. The heat seems to have come down a bit since former Microsoft engineer Mark Lucovsky walked into Microsoft CEO Steve Ballmer's office in November 2004 to tell him he was leaving the company for Google. In a sworn statement, Lucovsky said Ballmer threw a chair across the room and launched into an expletive-laden rant against Google and its CEO Eric Schmidt. When Lucovsky's account was made public about a year after the event, Ballmer described Lucovsky's characterization of the meeting as a gross exaggeration of what took place.
"There's still a core level of functionality and customizability that [Google Apps hasn't] yet achieved."
Robert Leibholz, Vice President, Sales and Business Development, Intermedia
While any screaming seems to have settled -- and Lucovsky has since moved on to VMware Inc. -- the two companies continue to make moves around search. Small wonder. With the search engine as the default homepage for much of the Web, companies that need to reap the kinds of outsized revenues that Microsoft and Google shareholders demand must control that high ground.
One of Ballmer's biggest problems at the time was Google's massive search share, and much of his focus in the interim has been on building up Microsoft's piece of the market. One case in point: the lengthy on-again, off-again courtship of Yahoo! Inc. as Ballmer tried to combine the forces of the No. 2 and No. 3 search players to make a run at No. 1. Then, Ballmer and Microsoft invested big in rebranding and re-architecting the search engine with Bing. On a related track, Microsoft and Yahoo! reached a deal in July in which Yahoo! agreed to use the Bing search engine on its sites while handling sales worldwide for premium search advertising for both companies.
Those moves are having some effect, but the climb for Bing remains steep. Figures released in April by online tracking firm comScore showed Bing's share of the U.S. search market had increased for the 10th straight month, but had still only reached a modest 11.7 percent. Yahoo! also increased share to 16.9 percent. Google declined slightly, but from a huge lead. Its new market share, according to comScore: 65.1 percent.
While doing enough to mostly stave off its two main search competitors, Google has been moving aggressively to attack from its search beachhead in every direction it can. Given Microsoft's ubiquitous position in IT, that puts the companies in conflict in dozens of technology markets.
Google's foray into the channel commenced about five years ago when the company was looking to penetrate the enterprise market with the Google Search Appliance. Microsoft quickly countered with its own enterprise search initiatives within the Microsoft Partner Network (then the Microsoft Partner Program).
Another area where Google is disrupting the channel is in the smartphone market with its Android platform. It would be inaccurate to say Google is trying to take anything away from Microsoft in the smartphone market. That would downplay Google's ambitions, and overstate Microsoft's position. Both companies are fighting each other and a slew of others such as BlackBerry-maker Research In Motion and Apple Inc., whose iPhone is disrupting the entire smartphone market.
In the emerging cloud, Google, Microsoft and others, such as IBM, Hewlett-Packard Co. and Amazon.com Inc., are racing forward by building out data centers and creating global networks of data centers that can be exploited by corporate developers, canny systems integrators and independent software vendors with global ambitions. Platforms like Windows Azure, Amazon Web Services and the Google App Engine dominate the discussion.
But it's in the area of online office productivity and communications stacks, where the battle changes from a spectator sport for Microsoft partners to a situation where the great powers of the world are digging trenches in different parts of your neighborhood, and it's time to pick which side is going to advance your own interests. Google's challenge with Google Apps is unlikely to finally crack apart the lucrative channel market in personal productivity and communications software deployments for the channel in the Office 2010 release time frame. Nonetheless, it's almost indisputable that Google is making more headway along an avenue of attack that has already been paved by Sun Microsystems Inc. and its new parent Oracle Corp. and OpenOffice.org.
The Google Apps and Microsoft Business Productivity Online Suite (BPOS) rivalry has not yet come anywhere near the intensity of the main battle between Microsoft and Google in search. But channel partners can see the lights from that artillery duel as they take part in a side battle that is also strategic for both companies -- the long-term strength and loyalty of channel partners.
Nonetheless, a lot is at stake: Microsoft has a franchise of 500 million Office users. Office is Microsoft's cash cow. While the 40 million customers who pay for its Office online services today represents a small but noteworthy percentage of that user base, Google says it has 25 million Google Apps customers, though a report by market researcher Gartner Inc. says only 1 million are paying customers. But that's not to suggest that Google's headway should be taken for granted. Nor should Microsoft presume Office will remain its cash cow forever.
Google Apps and BPOS
Google formally launched the Google Apps Authorized Reseller Program more than a year ago, and announced in February that it had hit the 1,000-partner milestone worldwide. According to Google Apps Channel Program Manager Jeff Ragusa, most of that growth in channel partners is relatively organic and the company is only now getting started with heavy-duty marketing efforts to recruit and enable partners. In its broad strokes, the Google program is fairly similar to the Microsoft BPOS, which was widely viewed by Microsoft's own partners as a reaction to Google's offerings. Both programs offer online versions of e-mail, collaboration on documents and spreadsheets, as well as other components.
Despite momentum, both Google and Microsoft are both realizing how critical channel partners are in reaching the small to midsize business (SMB) customers that both companies hope will become a lucrative market for the services they can offer.
"Cloud computing and Google are not a threat to your business because our roles are different," Ragusa said in a recent webinar with RCP. "Google's role is we leverage our vast data center resources and engineers to build products, great technology and innovate on that. The solution provider's role -- in our view -- is you know the customers, you know their business and you know the technology side, and you use that and you use your knowledge of your clients' business to apply technology from various vendors to solve business problems and achieve business goals.
"The smaller and more horizontal applications a VAR serves, the faster they will disappear."
Jack Zubarev, President, Cloud Services Division, Parallels
"We realize you have built a customer relationship where they trust you for technology advice and support, we don't want to get in the middle of that and the cloud and Software as a Service doesn't change the relationships," Ragusa said.
Meanwhile, even as Google takes its offerings to the channel, the company continues to plug gaps in its capabilities -- both to catch up with Microsoft's lengthy feature list lead and to help address new realities of online/offline synchronization that are arising as cloud-based models take hold.
For example, Google recently acquired DocVerse, a company started by former Microsoft employees from the Office Business Group that originally had board members from both Microsoft and Google. The product brings Google-style collaboration to the Microsoft Office suite.
For all the movement, however, Giovanni Mezgec, general manager of the Microsoft Office and Productivity Group, isn't really engaging in corporate spin when he says, "There's a lot of noise about [Google Apps]. I don't know if the usage is high yet."
Meanwhile, Microsoft has been tweaking the BPOS offering since its 2007 launch to bring more partners onboard. Yet Microsoft has been loath to share information about the number of seats that have been sold, and especially to separate those seats out from the related but broader category of Hosted Exchange Online and Hosted SharePoint Online seats. That reticence, along with a recent round of price cuts, fuels rumors that overall adoption remains quite low on the Microsoft side as well.
Many partners say that no matter how low adoption is now, they know they've got to adjust their business models to accommodate expected customer demand for the online productivity suites. How they decide which technology to go with is varied.
Google Inspires a Start-Up
One of Google's authorized resellers is Cloud Sherpas, a 2-year-old, Atlanta-based company that calls itself a cloud computing specialist and application developer. The company specializes in migration services for enterprises moving from Microsoft Exchange, Lotus Notes and Novell GroupWise, among other systems, to Google Apps.
"We took a bet that Google was really going to devote resources to the enterprise organization and they have," says founder and CEO Michael Cohn. "The partnership program is just in its infancy. One of the things we love about being a Google channel partner is they are very responsive to feedback, not to say others aren't. But we've developed strong ties with their support, engineering and marketing teams."
Cohn adds that he's been able to offer services with reasonable margins via the Google Apps platform. "There are a couple of different upsell opportunities when we start talking about adding additional products," he says. "Right now everyone is talking about messaging and collaboration and that's certainly what gets a lot of ink, but we see the Google offering as being a whole lot bigger than that. There's an opportunity to build custom applications on Google and have them hosted on Google App Engine that, over time, I expect to see additional offerings coming to the table and additional opportunities for us as channel partners to deliver value and a better margin."
Testing the Waters
For Clearway Technology Partners, a professional services and software company with a deep Microsoft history, the inclination was to stick with what it knew. Gene Rodgers, president and CEO of the Boston-based Gold Certified Partner company, says he never looked at the Google offering as anything but competition.
"We've been a dedicated Microsoft partner for going on 13 years now. We've been working on SharePoint and Exchange for most of that time. We've just found that the Microsoft-hosted offerings are logical extensions of the Microsoft product suite," Rodgers explains.
"We're absolutely thrilled that Microsoft has moved into this space, and we see the potential for a huge market shift in the next three to five years in this direction. It's not just the future, it's the present. We discuss BPOS with every customer," says Rodgers, who adds that he's not particularly worried about cannibalization despite his existing business of installing e-mail and collaboration solutions.
"We're seeing more market opportunities with clients that wouldn't have considered an Exchange installation, that's typical of small clients," Rodgers says. "But we're also seeing interest with large multinationals, especially when they have small offices in different countries, where they used to put servers." He says Clearway runs into competition with Google in about 10 percent to 15 percent of their accounts.
Rodgers says hosted Microsoft offerings currently account for about a fifth of Clearway's business. "It's gone from nothing to a fairly substantial amount, and I'd say about half of that is incremental revenue. We think it will be from 25 percent to 35 percent this next year."
Playing Both Sides
A Gold Certified Partner executive who's embracing the cloud but taking a different approach is Tony Safoian, president and CEO of SADA Systems, based in North Hollywood, Calif.
SADA Systems is an early and enthusiastic participant in the Google Apps Authorized Reseller Program and also offers Microsoft BPOS. Safoian says bringing out both offerings reinforces his firm's standing as a trusted advisor.
"We feel like there are customers that are a great fit for Google and culturally they may be a little different," Safoian said during the recent RCP webinar. "And there are customers who will never get away from a desktop-oriented experience or they just love the Outlook interface and they've invested a lot in that technology. We're just being honest and faithful to the market in being able to speak intelligently about both solutions and being able to offer whichever one makes the most sense."
Other Microsoft partners say they aren't yet certain they want to go down the path of also partnering with Google, but their patience with Microsoft isn't endless. Erik Thorsell, president of Minneapolis-based Success Computer Consulting is among the early beta testers of the forthcoming Microsoft Office 2010. He isn't ruling out investigating Google's program but it's not in the immediate game plan.
"So far, we've made the decision to stay loyal to Microsoft," Thorsell says. "Having said that, with everything that's happening with Microsoft going 'all in' on the cloud, we need to understand what that means for us as partners. So we have a team of people who are spending this quarter doing some learning and research about the competitive offerings and Microsoft offerings, to decide where we want to end in the near term and long term. Nothing is off the table but in the near term we are still Microsoft loyal partners."
Partners With Layers
The Microsoft channel is multi-layered, of course, and some partners have partners of their own, amplifying the significance of their decisions when betting on different platforms. One of those partners is New York-based hoster Intermedia, which markets itself as the largest provider of Microsoft Exchange Server 2010 services and has a network of nearly 5,000 partners helping to resell them.
Robert Leibholz, senior vice president of sales and business development at Intermedia, has been an outspoken critic of several of Microsoft's moves around BPOS. But when it comes to the Microsoft-Google face-off, Leibholz is entirely in Microsoft's corner for now.
"I think Google Apps is an interesting product. We don't sell Google. There's still a core level of functionality and customizability that [Google Apps hasn't] yet achieved. At the same time, it's Google; they know what they're doing," Leibholz says.
Intermedia and its partners rarely come up against Google in deals, Leibholz says. "When we do see it in the Exchange marketplace, it's typically for the much smaller deals or occasionally for some really large deals that we would never touch anyway, like a municipality with 30,000 mailboxes or a university."
In those cases where Intermedia partners take on Google resellers in deals, Leibholz has a detailed battle card ready for them to highlight differences in service-level agreements, security, administrative control, support and backup.
A Longer-Term Outlook
Industry observers view Google as big trouble for Microsoft long-term, although they have a mixed prognosis for Microsof channel partners.
Silicon Alley Insider Editor Henry Blodget thinks Microsoft appears to be shrugging off Google Apps as a threat to its $10 billion-plus-per-year Office franchise, but he says it should be taking Google more seriously there.
" ... Microsoft Should Be in Major Panic Mode," Blodget writes. Why? He argues that Google has improved the capability of its offering and that many Office users will migrate. Microsoft can add more features, he argues, but those will appeal to a small subset of overall users.
"So don't take the puny size of Google's apps business and the fact that big companies aren't seriously considering Apps as an alternative as a sign that Microsoft is safe," he writes. "Microsoft isn't safe. Microsoft is very exposed."
Directions on Microsoft analyst and RCP columnist Paul DeGroot describes Google's channel effort as nascent but doesn't discount the threat the company could pose down the road.
"It's probably more important as a symbol of what Google is willing to do," DeGroot says. "Google is getting some channel experience and exposure, something it hasn't had much of in the past. While I don't see it as an immediate threat, it is something to watch out for. Google has the ability to surprise, which makes Microsoft nervous."
To Darren Bibby, a channel analyst with research firm IDC, the fact that Google is still learning about channels -- while Microsoft is approaching channels from decades of experience -- is probably a good reason for solutions providers to include Microsoft-hosted offerings in their mix. Even Google's previous channel experience with the enterprise search appliances was mostly outsourced to distribution to handle, Bibby notes.
"The technical comparisons you can make are Microsoft BPOS against Google Apps -- that's a pretty fair comparison. But Microsoft is a partnering company, with something like 95 percent of their revenues coming through partners. They have partnering in their DNA. Partnering is not in Google's DNA. [Google is] trying some things," Bibby says.
Much as Cloud Sherpas, SADA, Clearway, Success Computer and Intermedia are choosing different routes, Bibby says every partner company will have to pick its own slightly different course.
"The partners from Microsoft who might be thinking about BPOS -- and I think a lot are thinking about it -- those partners may also be thinking about Google Apps. They're not interchangeable," Bibby says. "I think it's a really tough question. It's like asking what's a healthy stance on e-mail altogether. Everyone's going to do something that's a little different depending on their business. For someone who is totally invested in the Microsoft stack, BPOS is a great addition."
At the same time, no matter which vendor a solutions provider sides with, any shift toward cloud computing will reshape the channel fairly radically over time, and partners must also focus beyond their relationships with specific vendors.
"I think that the market is going to be demanding [offerings like BPOS and Google Apps], and it's good for customers. I think the jury's still out on whether these are good models for partners to be in. These are really low margins," Bibby says.
Jack Zubarev, president of the cloud services division of Parallels, which provides virtualization, automation and provisioning solutions to hosting providers -- many of whom then sell cloud-based services to small businesses -- provides a cautionary tale for partners who don't find a way to add value to their resales.
"In the traditional hosting industry, historically the channel was very, very important. Five years ago, the majority of small businesses did not really buy services of a company like GoDaddy directly. They would go to a Web designer, and the Web designer would put Web applications together," Zubarev says. "What's happening today is we're seeing more and more small businesses go directly to those big hosters. The whole population is becoming more technology savvy, and the industry evolved to more easy-to-use tools. Those who were bottom-feeders creating very, very simple Web sites for very, very small companies disappeared."
The same will be true in IT, Zubarev predicts: "The smaller and more horizontal applications a VAR serves, the faster they will disappear."