Watch Out for the Mammals

Success in the small business space has always been Microsoft's to lose. Traditional business competitors, such as IBM and Oracle, have only a fraction of the touch Microsoft has in that market, thanks to cheap, ubiquitous PCs that run its software.

Beyond the very small businesses, with 10 employees or less, Microsoft partners have played a pivotal role, ensuring Microsoft's dominance well into the midmarket by leveraging the Microsoft brand and easy-to-use but powerful tools for basic networking, productivity and collaboration.

Microsoft's lock on the small and midmarket is nevertheless threatened, not so much by competition, as by technological change, and the Internet in particular. By vastly expanding the presence, speed and reliability of inter-networks, it has erased locality. Because important apps run over the network, and the network is worldwide, why care about where they run and who manages them, as long as they're well-managed and don't cost as much as a whole staff to manage a server room?

For a company like Microsoft, totally dependent on the OS and productivity applications running locally, this is challenging. It isn't, however, necessarily bad, assuming that change giveth and change taketh away, as Microsoft has certainly seen. The shift also promises many benefits in the long run, such as fewer laggards running old versions of the software.

At the moment, we see this space dominated by giants like Microsoft Online Services and Google Apps, running in gigantic datacenters. While the giants do offer a partner channel, they still prefer to own the customer themselves, leading to a lot of direct or nearly direct sales that can starve the channel.

Looks grim for the little guy, as a services provider, an integrator and a hoster, doesn't it? I don't think so. Paradoxically, as this technology is more widely accepted, locality still matters.

Take Australia, where interest in hosted services and applications is strong, and networks are mature, but some big customers are balking. The reason: None of the hosting giants has a datacenter in Australia (population 21 million, a bit larger than Florida's). That means that some of the usual suspects, such as public sector organizations and enterprises, who could gain from the economies offered by hosted services, are wary because they don't want their data to leave the country.

This problem won't be solved by putting a large datacenter there -- at least two are required for redundancy.

So let's imagine a different world, a world where even, say, a Honduras (7 million people and a lot of hurricanes and earthquakes) can enjoy the benefits of hosted services. In this world we don't need more big, power-hungry datacenters. We need a lot of small ones, which don't require massive nearby power generation, and can offer multiple levels of redundancy. Local datacenters can also run applications for local customers, to reduce network traffic and latency over long network backbones.

None of this is magic. It's already done, just not as much as I'm convinced it will be. Small hosters already store customer data and deliver apps, including most of the important Microsoft apps, from smaller datacenters that have uptime guarantees as good as Microsoft's and Google's. As the market for such services grows, it will likely spur local application development, even competition among vendors for a spot in a hoster's datacenter.

New business models are likely to emerge as well, such as hosters or telcos who offer free applications but make their money from storage or connectivity.

In short, I don't see the giants owning this game for much longer. Like brontosauri of old, they may not notice the tiny mammals scurrying around their feet, but that's where the future lies.

For Microsoft, the opportunity is to enable this model, with software that can be hosted locally, and a familiar licensing model -- high volume, low cost, as thousands of local datacenters power up. That should be good for Microsoft, small customers and small partners.

About the Author

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