Microsoft's Extinction-Level Event
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News Analysis. If you're a dinosaur, extinction is inevitable. |
But dinosaurs aren't replaced by mammals overnight. Evolution is a long process, which is why Microsoft can get away with its convoluted approach to partnering on hosted Web services. And I don't believe Microsoft's partner pitch; snake oil salesmen and pyramid schemers have made it before.
Simply put: Microsoft hosted services will bring some partners to extinction, because to make the big money they'll have to commoditize their own market. Shall I repeat that?
To quickly recap: Today at the Worldwide Partner Conference in Houston, Microsoft announced pricing for its Online Services, which initially will be available in Deskless and Business Productivity suites. The Deskless version costs $3 per employee per month for light versions of Exchange or SharePoint. The full suite, at $15 per employee per month, offers up hosted Communications, Exchange, Office Live and SharePoint products. Microsoft partners that sell the suite get up to 18 percent back the first year and 6 percent back thereafter.
"Once a quarter we send them a check," said Eron Kelly, director of Microsoft Online Services, during a conference call today.
Eron used the example of a partner selling 3,000 seats of Microsoft Online Services, which would have "almost $100,000 in residual fees." By my reckoning, that's $540,000 to Microsoft the first year and $97,200 for the partner—or $24,300 for the first partner payment. That's a helluva lot of upfront incentive for a partner to sell Microsoft hosted services.
But Eron's additional-year partner payback didn't initially add up for me. "By the end of the third year, that would grow to $162,000 if they were able to add those 3,000 seats each year." By my math, the partner would get $32,400 per year or $64,800 at the end of the third year. Near the end of the conference call, I asked Eron to explain his math. He's assuming that the partner would sell an additional 3,000 seats, not keep them as I assumed he meant.
Let me be clear: I know Microsoft isn't selling some kind of pyramid scheme, but it sure feels like it. The only way to sustain the revenue stream is to sell more seats in subsequent years. Here's how the math works out: In year two, the partner would make $129,600 by selling 3,000 more seats. In the third year, that take would be the aforementioned $162,000. In the fourth year, again adding 3,000 seats, the incentive would be $194,400. Half that amount, $97,200, would be equivalent to the partner's take from the first year incentive.
Partners must continue selling more hosted services seats to sustain Microsoft's payback. From Microsoft's perspective, it has got to be a sensible model. Partners make more by selling more. It's Partnering 101. But the process also cannibalizes the partners' market, by commoditizing server software that they would otherwise sell or service.
Microsoft Is the Landlord
Eron put forth some lamebrain perspective about how much partners would make selling additional services, such as Active Directory and Exchange e-mail integration, to support Microsoft Online Services. D`oh, these are short-term, not long-term services. There is a point where the work is done, because the customer has moved out of the owned property into a rental unit.
Microsoft is the new landlord, when the moving is done. The partner then gets paid by property owner Microsoft rather than by the enterprise business owner. Microsoft pays less over time, unless the partner moves more of its customers to rental units. By providing direct services under contract to businesses that own their own property, so to speak, the partner can collect ongoing services, maintenance and help desk fees.
I haven't done the hard math on this yet, but let's try a hypothetical scenario. Partner Bill has 12,000 seats, same number which in my aforementioned example he would have converted to hosted services over four years. Hypothetically, Bill collects a mere 10 bucks per seat for providing comprehensive site maintenance, including testing, deployment and management services. That's $120,000 a month in service fees, or $1.4 million a year. What if Bill made just $3 per seat per month, same as Microsoft charges for its Deskless suite? That's $36,000 a month, or $432,000 in one year. Bill doesn't need to aggressively sell 3,000 more seats each year, but simply organically grow his business and properly service existing customers to maintain them.
The example oversimplifies, because the partner assumes additional costs that would reduce margin of profits. For Online Services, Microsoft would assume more of the costs of doing business, but by no means all. Example: Sales and marketing. In the ownership example, the partner maintains customers and steadier revenue stream. For Microsoft rentals, the partner turns over customers to Microsoft, reducing the long-term pool of customers, commoditizing server software services and requiring further commoditization to continue generating revenue.
For partners looking to expand their businesses, Microsoft has given them incentive to get new customers and for a handsome first-year cut of the proceeds. But the gains, whether from hosting sales or partner-provided migration services, are short term. First benefit goes to Microsoft, which fosters commoditization to its benefit; better that Microsoft gets paid for hosted services than Google, Salesforce.com or other Web 2.0 platform companies.
Microsoft doesn't want to be the dinosaur, which is why the model now embraces hosted services. But Microsoft's partner approach to hosted services is sure to ensure that many partners will remain dinosaur's bound for extinction. Perhaps this year's Worldwide Partner Conference should be called Microsoft's "Extinction-Level Event."
Related Posts:
- Microsoft's Suite Response to Google, Partners, Microsoft Watch, July 8, 2008
- Microsoft Gets Hosted, Microsoft Watch, March 3, 2008
- Office Goes Live and Online, Microsoft Watch, Oct. 1, 2007
- Microsoft Software: Rent Me, Microsoft Watch, July 20, 2007
- Where Is Microsoft's Services Platform?, Microsoft Watch, March 1, 2007
Comments (11)
"Simply put: Microsoft hosted services will bring some partners to extinction, because to make the big money they'll have to commoditize their own market. Shall I repeat that?"
The segment is being commoditized whether MSFT does anything or not. Indeed, as you have pointed out repeatedly, MSFT is responding not leading. If those customers go GOOG, for example, then MSFT's partners make nothing. So the discussion about what partners make under this plan is really moot. As I read it, it's a fairly generous offer that gives partners some time to adjust to the new reality and hopefully move up the value chain as they have had to do before. Business is about adapting, for MSFT, its partners, and everyone else.
Posted by Paul | July 8, 2008 2:21 PM
Microsoft is looking for new way to license or rent its software, in a way that will extract more money from its customers, simply put.
If it can do this, thi bottom line will go up without too many people noticing that in effect, Microsoft has imposed a price increase.
And its more than just greed as to why MS is doing this. The fact that Vista is not going over well with businesses, which are the main money makers for Microsoft, has been observed. The fact that Microsoft is losing desktop marker share to both Mac and Linux, has to translate also into less revenue at some point. Also, that trend continues. MS online services continue to lose ground to Google as well, and post revenue loses.
Therefore, the MS stock will take a major correction (beating) if the revenue (profit) does not continue to increase. The only way to do this is to in effect raise the price, on those who have not yet abandoned ship to Linux (free) or Mac.
Posted by chips | July 8, 2008 2:35 PM
In a few years this web site will be extinct, or it will have to change it's name to Mac Watch. You had better check to see if that URL is in use and buy it quick.
Jesus, who wants to "watch" Microsoft? Lonely old men living in their mother's basement?
Posted by Steve Jobs | July 8, 2008 4:08 PM
Steve Jobs wrote: "In a few years this web site will be extinct, or it will have to change it's name to Mac Watch."
I write Apple Watch, too, so we're covered. http://blogs.eweek.com/applewatch/
Posted by Joe | July 8, 2008 4:53 PM
Chips - ummm...you don't get it. I'll try to make it simple for you with an example. Today if a customer wants to run a mail server (running Exchange or Notes or any other on-premise mail server) they have to buy a big server box (or more), an OS and the mail server softwarwe. The hardware is by far the biggest price tag item. For the sake of simplicity, let's say that all costs $10,000. Then they have to manage it. They have an IT guy sitting there setting up mail boxes, doing upgrades/updates, replacing bad discs etc. The cost of maintaining the box is much higher than the cost of the hardware and the software. So they have fixed capital costs plus a lot of ongoing operating expenses. I don't know the exact numbers but I can guarantee you that the total cost per mail box/month is a HELL OF A LOT more than what Microsoft is charging for hosted Exchange. So what does the customer get out of it? Lower/no capex and predictable ongoing opex. What does Microsoft get out of i8t? Predictable revenue. Microsoft is betting that they can automate the management of the Exchange servers they're operating in their datacenters and ultimately deliver the services at a much lower cost to them (and by extension, the end customer) than the end customer could on their own.
To me this seems like a win win.
Also, you're misreading the Mac market share numbers. Mac market share IS increasing...at retail. The vast majority of Windows sales are through volume license agreements with businesses. If you factor in the total unit sales of PC's and Mac's spanning retail, direct/online and volume licensing, Mac is still a blip. Linux isn't even a blip. It's a blip on a blip.
People have been predicting the death of Microsoft for many years and, yet, they continue to grow revenue in the teens every year and grow profit faster than revenue. I'm not clear on how that leads to disaster for MSFT.
Posted by Mark Ashton | July 8, 2008 6:26 PM
Mark Ashton, MS blogger says:
"People have been predicting the death of Microsoft for many years and, yet, they continue to grow revenue in the teens every year and grow profit faster than revenue. I'm not clear on how that leads to disaster for MSFT."
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Let me spell it out for you so you can understand where people are coming from. I have not been predicting the death of MS, although that would not bother me at all. What is being predicted, and is happening to a degree in the last 2 years, is for Windows to decline (lose percentage) on the home desktop. At its peak, windows had 95.3% of the desktop market, and now it has less than 91%. The long gradual decline, that Joe also talks about. Is it set in stone for this to happen? No. Maybe Windows Seven will be a great OS, instead of being Vista2, but somehow I doubt it. MS will be around for a long long time. MS has more bucks than almost anything. Where would I like to see MS go? Down the road, I would like it to become a holding company, with new management, that had better morals.
Now second,the cost going up, has got to make users, corporate or home, think about the alternatives. How can you increase revenue from a smaller user base, without raising the price? Clearly, its a price increase.
Thirdly, MS has not done enough to protect the home user by making Windows virtually malware free, in all this time, as alternative Operating Systems. This is another reason that users are trying out the other systems, and rightly so.
Posted by chips | July 8, 2008 7:33 PM
Dinosaur's extinction event:
catastrophic events that may have reduced sunlight and hindered photosynthesis, leading to a massive disruption in Earth's ecology.
It allowed the development of other especies with better adaptation
(class Mammalia)
catastrophic events (current):
-Vista
-Google
-Mac
-Cheaper Laptops
-European Commission
-Governments changing Microsoft for Open source
-World opinion, etc,etc
especies with better adaptation:
some suggestions?
"I'm not clear on how that leads to disaster for MSFT".
Knock Knock!... is someone there?
Posted by Marco | July 8, 2008 7:42 PM
to
Posted by Marco | July 8, 2008 7:46 PM
Great one Marco!
Posted by TCY | July 8, 2008 7:56 PM
Since the mid 80's Microsoft has grown leaps and bounds and with it an entire industry of third party software companies and seas of technical support to perpetuate ultimately Microsoft.
Microsoft has been around centuries as far as software is concerned, and there is hardware specifically designed for MS to take full advantage from, and of course visa-versa. If it wasn't for the necessities (necessitation) of this, unlike Linux, we could all be running Pentium III, IV's just fine with 256 and 512 megs of RAM.
If Microsoft unrealistically died today, there would be a "Great Dying" of the hardware, support, and third party software companies -- No great dying forecasts in the future -- Unless another asteroid impacts us, and then of course, who will be around to care about computer technology?
Yes, Microsoft hasn't been an innovator in bringing things and killer apps to us, heck it was the need for spreadsheets that people in general saw as the last killer app -- Microsoft didn't create, only stole and copied -- Same for most of the Office products they sell which I love so much -- Yes, I am a huge fan of MS Office 2007 predicated on theft of ideas and "innovated" upon since the primitive days of Lotus 123 and WordStar, Peachtree and such.
Apple isn't much better, and of course, Steve is just as much as a thief as anyone at Microsoft in the first place.
Posted by Douglas S. Taylor | July 8, 2008 8:30 PM
To TCY : Thanks!
Posted by Marco | July 9, 2008 8:26 PM