Channeling Microsoft Hosted Services

Microsoft announced a preview of its hosted CRM service earlier today, at its annual partner conference in Denver. Dynamics Live CRM, which will be available in two versions, is Microsoft's answer to Salesforce.com. The service also competes with Microsoft partners that offer hosted CRM services.

Microsoft is unusually sensitive to channel conflict, because of near dependence on partners. Microsoft has no large-scale sales or services force, relying instead on its network of partners. The company makes concerted, and sometimes misguided, efforts to prevent channel conflict.

Giving the Channel Too Little
To mitigate channel conflict and encourage Live CRM sales, Microsoft will kick back quite a bit of revenue to the channel: The partner of record will get 10 percent of the Live CRM customers' annual subscription fees—15 percent in 2008. It's a heck of an incentive.

The move is precedented by other Microsoft initiatives, where partners get a big cut of some products and services. Microsoft launched Open Value, its volume-licensing program for small businesses, also with a 10-percent cut for channel partners. Microsoft doesn't just give away 10 percent of anything. Somebody pays, and there is good chance it's the software buying customer. If not now, some time later when Microsoft's market category position is strong enough to raise prices.

The incentives surely may seem good to some partners, but Microsoft often gives the big revenue cuts where risk of channel conflict is greatest. Channel conflict avoidance is just that, denial of a problem and reluctance to make hard decisions in the present that would benefit partners and customers in the future. Instead, Microsoft's approach gives the channel a short-term benefit with long-term problems—and real channel conflict. If Microsoft's hosted CRM strategy pays off, how many partners will still be offering hosted Dynamics CRM in three years? Not many methinks. That's real channel conflict.

Related: Because Microsoft makes channel conflict avoidance a priority, the company makes some bad business decisions for its partners and customers. Live CRM is a great example. Salesforce.com's big benefit isn't a CRM feature: Easier management. Central hosting and delivery means that Salesforce.com can add features or make major upgrades that are immediately available to all customers. There are no messy upgrades to apply.

Conceptually, Microsoft should be able to do something similar with Live CRM. However, its partners will offer on-premise hosting for their customers and likely more difficult management and upgrades. It's a 'half a cake and eat it, too' strategy where Microsoft tries offering a hosted product without alienating its channel. But if Microsoft can push features faster and from a central datacenter, how will Live CRM not compete with partners who must do less?

Channel Conflict is Inevitable
Microsoft's approach to the CRM market is looking lots like its Xbox strategy and other products before it, in what I'll call a tried-and-true scorched earth policy. When entering a new market where another company dominates, Microsoft typically will operate at a substantial loss and significantly undercut a competitor's pricing. Microsoft's cash position and main revenue source, mostly Office and Windows, means the company can undercut competitors and lose money longer than most of them can.

Microsoft's hosted CRM product approach—giving 10 percent to 15 percent back to partners and undercutting Salesforce.com pricing—is about snatching market share at whatever cost. Microsoft's Live CRM pricing will be $44 per user/per month for the Professional version and $59 per user/per month for the Enterprise version. However, Professional pricing will be $39 per user/per month during 2008 and free during an early-access program that will run through the official launch. The price that should matter now to Salesforce.com is free. Salesforce.com pricing starts at $65 per user/per month.

Microsoft's scorched earth pricing strategy foreshadows what the company will invest elsewhere when offering other hosted services or launching its forthcoming Windows Live services platform. The company is embarking on a winner-take-all approach but carrying partners along like baggage. They're cut in for the wrong reason: To avoid channel conflict. If Microsoft really wanted to make partners profitable, it would do a turnabout and offer them platform tools and reasonable licensing terms and fees for delivering hosted services. As long as Microsoft offers hosted services, it will compete with partners. Channel conflict is inevitable, at least from the partner tools and incentives unveiled today.

Google Can Laugh All the Way to the Bank
Listening to Microsoft CEO Steve Ballmer's partner conference keynote today, I repeatedly shook my head in disbelief. For one, he spoke about the importance of partners while broadly discussing a strategy that must eventually lead to increased channel conflict. He opened by yelling to partners, "You guys energize me!" I wondered what he's doing to energize them.

For another, Ballmer spoke about the future—more of this 'what we're going to do for you tomorrow' kind of speak—rather than explaining what Microsoft is doing for customers and partners today. Microsoft executives spend too much time touting future products and features when their customers and partners live in the present.

Ballmer made clear that Microsoft plans to take a pervasive services approach, but it's the same old, tired story about .NET. Ballmer is starting to sound like Sun Chairman Scott McNealy, circa 1997, when he incessantly talked about the benefits Java would someday deliver.

Ballmer also showed weak foresight. On the one hand, he boldly talked about services like Microsoft would reinvent itself around them. But the approach is simply too dependent on heavy desktop software clients. Live CRM, with its dependence on Outlook and Windows Workflow Foundation is a good example. As I blogged this morning, Microsoft should focus more on delivering services plus software rather than software plus services. Microsoft's misguided strategy will benefit Web 2.0 competitors—and hurt partners.

Profitable Web platform companies like Google have a cleaner model in which partners profit. The money is all in relationship. Keywords related to "x" search query makes or costs somebody money; same for contextual ads. Direct company relationships through, say, licensing of APIs (application programming interfaces) can lead to somebody making money, too.

Distribution of the centralized, server-based services is by way of the public Internet. Around it is built a different kind of channel. Sorry, Microsoft, but you're looking more like a retail store when many people are shopping Amazon or eBay. There's a difference: The retail store can go online and offer both experiences without alienating partners. You can't have it both ways, where you mostly rely on partners in one place and compete with them somewhere else. To reiterate: I see huge channel conflict ahead, regardless of how Microsoft has laid out services options for its partners.

You can have your cake, but it you can't eat it, too.

Related Posts:

• Which Comes First, Software or Services?, Microsoft Watch, July 9, 2007
• Is Microsoft's First Customer You?, Microsoft Watch, July 6, 2007
• Live Lives, But How Well?, Microsoft Watch, June 27, 2007
• Why Google Succeeds, Part 2, Microsoft Watch, June 15, 2007
• Why Google Succeeds, Part 1, Microsoft Watch, June 15, 2007
• Microsoft MIXes It Up, Microsoft Watch, April 30, 2007
• The Google Quandary, Microsoft Watch, April 24, 2007
• The Google Problem, Microsoft Watch, May 31, 2007
• Who Pays for Software Plus Services, Microsoft Watch, March 15, 2007
• Tell Me What?, Microsoft Watch, March 14, 2007
• Google Catfight About 30 Years in the Making, Microsoft Watch, March 6, 2007
• What Is Microsoft's Services Platform?, Microsoft Watch, March 1, 2007
• Why Google Matters to Microsoft, Microsoft Watch, Feb. 22, 2007
• Google and Long Tail Computing, Microsoft Watch, Feb. 22, 2007
• Why I Killed Office Live, Microsoft Watch, December 29, 2006