Microsoft Updates its
Software as a Service (SaaS)
Balaka Baruah Aggarwal &
May 15, 2008
This Springboard Research document presents insights, observations and analyses gained
from Microsoft’s Asia Pacific Analyst Summit, held in Singapore on April 23 and 24 ,
2008. The basis for the insights expressed within this document – beyond our continuous
tracking of Microsoft’s business activities – includes information obtained from
interviewing senior Microsoft executives at the event.
Microsoft has crystallized its SaaS strategy, (which the company calls software plus
services), with the announcement of two service offerings: Windows Live and
Microsoft Business Productivity Online Services, also known as Microsoft Online. The
aim is to tap new customers with the former and upsell to existing customers with the
latter by allowing customers to blend their online software with on premise software.
Windows Live is targeted at retail consumers, Small Office Home Office, and SMBs. It
is ad-driven and free. Microsoft Online is targeted at larger corporates. It offers
applications with more functionality and is subscription based.
Microsoft’s ‘Live’ services, (which include Windows Live as well as non-Windows
branded offerings such as Office Live Workspace), are available across the entire Asia
Pacific region while Microsoft Online is currently only available in Australia through
selected partners. Wider regional distribution is contingent on Microsoft selecting
Microsoft will actively encourage existing customers to blend their on premise
products with online applications. Dynamic CRM version 4.0 supports a single multi-
tenant code base to deliver on premise and on-demand deployments. Microsoft has
also announced plans to similarly rearchitect other products.
Microsoft announced plans to offer SaaS solutions targeting retail consumers, SMBs and
enterprise customers with two variations. The enterprise edition of Microsoft Online is its
more serious attempt to offer applications as a service. Initially the enterprise edition was
targeted at organizations with over 5,000 users but has now been extended to smaller
enterprises. Microsoft’s immediate go-to-market strategy is to continue working with
hosting partners in the region, specifically to help support hosted implementations of
Microsoft Exchange Server, Microsoft Office SharePoint Server and Microsoft Office
Communication Server. Microsoft announced plans to offer Microsoft Online branded
services hosted from its servers during the first half of 2009.
Microsoft Business Productivity Online Services includes Exchange Online, SharePoint
Online and Office Communications Online, all of which complement Microsoft Office.
Business customers can balance deployments of Office servers across on-premise and
Online instances. Microsoft Dynamics CRM is offered as an application and a platform
upon which Microsoft’s customers and partners may develop new applications. Its latest
version, Dynamic CRM 4.0, launched in December 2007, supports multi-tenant
architecture that allows both Microsoft and hosting partners to host CRM in much higher
volumes. Microsoft has also announced plans to rearchitect SharePoint and Exchange
servers but no release dates were announced.
Springboard Research believes that these announcements mark Microsoft’s
acknowledgement that its software business cannot remain primarily Windows desktop-
centric and must evolve to incorporate both software and services, with the latter being
delivered through online/web channels in the form of SaaS. So far, Microsoft’s reluctance
to enter the SaaS market is understandable given that its entire business has been built
around software products. But the realities of the market, as well as a need to help
customers leverage existing MSFT-related software investments, have forced it to adopt a
more pragmatic middle path by positioning its offerings as “software plus services”, as
opposed to the software-as-a service (SaaS) positioning of net-native companies like
Salesforce.com, RightNow, NetSuite, and Google.
Ironically, Microsoft’s pragmatic focus on a blend of on-premise and off-premise
computing will ultimately prove to be the most likely scenario for most large and mid-size
companies. Organizations will likey seek a mix of options when it comes to software
hosting: at the customer’s premise run by the customer; hosted by Microsoft and
accessed via the internet; or hosted by a third party. Even the most vocal SaaS providers,
Google and Salesforce, have tacitly acknowledged that online presence is not possible for
users at all times and have begun delivering offline variants of their applications.
In Microsoft’s vision, the customer can consume its application as a product, service, or
some combination of the two. The company’s strategy is to actively encourage customers
through its pricing to blend the on presmise products and hosted applications for which it
will rearchitect existing products.
Microsoft’s software plus services strategy reflects its attempts to play catch-up in the
SaaS market while simultaneously leveraging its massive software installed base as a
competitive advantage. It is one thing to acknowledge that SaaS as an approach is critical
to Microsoft’s software strategy, yet another to translate that realization into a
consistent, executable vision by aligning network-centric software ‘services’ with its
product strategy. Still in its beta stage, Microsoft acknowledges its online services strategy
Springboard Research believes Microsoft’s software plus services strategy remains a work
in progress. The primary challenge Microsoft must address is pricing. The company must
lure customers to its hosted applications (in part to blunt the growth of competitors) while
not cannibalising its on-premise applications – still Microsoft’s cash cow. At the same,
Microsoft must finalize a pricing strategy for its partners, who will be keen to ramp up
sales and marketing activity as soon as possible.
As our previous forecasts and market reviews have shown, the SaaS market in Asia Pacific
is experiencing a rapid phase of growth and gaining acceptance quickly. We expect SaaS
applications to continue gaining share at the expense of on-premise software over the
next five years at a minimum.
Microsoft’s entry into the SaaS marketplace is a further validation of the SaaS market’s
potential and viability. Although Microsoft is still finalizing its SaaS strategy and offerings
(which the company continues to insist on calling ‘software plus services’), we expect
Microsoft’s entry will trigger a rippling effect. This is especially true given some core
Microsoft strengths: Microsoft’s enormous base of customers to whom it can upsell, huge
mindshare among the developer community and a strong base of channel partners. As
Microsoft’s SaaS strategy gets fleshed out further, the company’s strengths will help
Microsoft compete effectively with net-native players, most of whom continue struggling
to set up a channel strategy and establish their presence amongst the ISV community.
Microsoft’s software plus services strategy is a work in progress. However, the company
appears committed to embracing the internet (and cloud-based computing) as a
complementary software delivery approach. We expect Microsoft to struggle to reconcile
its SaaS offerings and approach relative to its traditional, PC-based world view.
With its recent announcement, Microsoft appears to have accelerated its presence in
managed services. However, the company is still fighting a defensive battle relative to net-
native upstarts (Google chief among them). Microsoft’s challenge is to execute a fine
balancing act between it’s traditional PC-based revenue stream (and the massive margins
that stream provides) and the market demands for more flexible, internet-based software
design and delivery options. Its ability to manage this balancing act could very well
determine the future of Microsoft itself.
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