Microsoft Unveils Online Services Pricing; VARs Want More

Microsoft has finally come to the table with detailed information on pricing and commissions for partners that sell its hosted services. But for solution providers who've grown used to controlling all aspects of their customer relationships, the numbers aren't very enticing.

In a Tuesday keynote at Microsoft's Worldwide Partner Conference in Houston, Stephen Elop, in his first public speech as president of Microsoft's Business Division, said Microsoft will give 12 percent of the first year's subscription value and 6 percent of the ongoing monthly subscription fee to partners that sell its Online portfolio of hosted business productivity services, which includes Exchange, SharePoint, Office Communications Server and Office LiveMeeting.

As expected, Microsoft is pricing its Online services aggressively. Currently in beta and due to launch sometime later this year, Exchange Online will be priced at $10 per user/month; SharePoint Online will be $7.25 per user/month; Office Communications Server Online will be $2.50 per user/month; and LiveMeeting will be $4.50 per user/month. Microsoft will offer these services in one-year automatically renewing agreements.

Microsoft is also selling a bundle of Exchange and SharePoint services with basic functionality for $3 per user/month, to meet the needs of workers who only spend a fraction of the day in front of a PC.

For Online services, Microsoft said it will share ownership of the customer with the channel partner of record, and that partners will administer and manage the services on behalf of the customer. Customers will buy services and sign agreements with Microsoft for the services, but they'll also sign agreements with their partners, according to Microsoft.

Eron Kelly, director of product management in Microsoft's Business Online Services group, said the ability for partners to generate recurring revenue is the key channel opportunity in what Microsoft is billing as Software Plus Services, its term for software as a service it delivers in conjunction with partners.

"We are providing partners with an ongoing recurring revenue foundation so that our incentives are aligned," Kelly said in an interview prior to WPC. "There's an opportunity for co-ownership here. This helps with partners' transition from the break/fix model to an ongoing revenue stream that includes interacting with the customer."

Channel Backlash

Microsoft spooked the channel earlier this year when it announced plans to sell hosted Exchange and SharePoint to companies of all sizes, including the sub-5,000-seat space that it previously left to partners. At the time, Microsoft insisted that it would involve the channel in these deals, and today's announcement is the fulfillment of that pledge.

For now at least, Microsoft said the software-as-a-service offerings provide alternative options to customers. Both solution providers and customers can still opt for on-premise versions of the software or hosted software from Microsoft hosting partners. And many solution providers say they will do just that.

Despite Microsoft's insistence that the channel will still make money from its software-as-a-service offerings, many solution providers told ChannelWeb they have no intention of giving up control of billing, branding, pricing and service delivery to Microsoft, especially since Microsoft won't allow partners to offer private-label services. Basically, partners said they feel they should getting more for doing the sales legwork for Microsoft.

"Twelve percent is not enough," said one partner, who asked to remain anonymous. "To give partners a real incentive to resell these services, the margins on services has to be huge. Why? Because we're spending all this money to locate and qualify leads, and with no support or other middleman revenue. Basically, we're just handing the customer to Microsoft."

Dave Sobel, CEO of Evolve Technologies, a Fairfax, Va.-based Microsoft Gold partner, agreed that the 12 percent commission isn't enough to make up for losing control over the relationships he has built with customers. "There are tons of hosting providers I can partner with and do private-label workand#8212;but it would be nice to have that partner be Microsoft," said Sobel.

NEXT: Where the money is

VARs that are already seeing healthy revenue streams from private-label partnerships with third-party hosting providers say they're making far too much money to consider giving up control to Microsoft.

One example is Silicon East, a Manalapan, N.J.-based solution provider, which currently offers Exchange hosting, e-mail spam filtering and SharePoint hosting in conjunction with third-party service providers.

Silicon East President Marc Harrison said Microsoft's services model could alienate many of its channel partners and cause them to seek other vendor partners.

"We already make more money than Microsoft is offering us, and we don't have to share ownership," Harrison said. "We get billed by the hosting company, and we bill the client, and also provide front-line technical support. As a reseller, that's a much better arrangement than to be sharing your customers.

"It's very clear that in no way will the profit that comes from reselling hosted services come anywhere close to what we have been making maintaining these services for clients on an on-site server," Harrison added.

Another Microsoft Gold partner said Microsoft's new services model contradicts its longstanding track record as a channel-friendly company in the IT industry. "What Microsoft is proposing isn't a partnership. It's a simple reseller agreement," said the partner, who asked to remain anonymous. "And I can make more money showing people how to use eBay."

Microsoft's Challenge

Microsoft said its decision to handle billing, paperwork and revenue from the sale of Online services was the result of feedback from VARs and integrators who said these tasks are prohibitively costly and fall outside the scope of their core businesses. Microsoft said removing that cost will allow channel partners to focus more on value-added services.

One partner, at least, concurred. Offloading management and maintenance should allow partners to focus on extending the technology to meet customers' business needs, said Todd Golden, co-founder and director of alliances at PointBridge, a Chicago-based solution provider and Microsoft Gold partner.

Microsoft is essentially creating a hosted services equivalent of the existing Microsoft stack and partner opportunity ecosystem by virtue of encouraging partners to offer their own hosted services on top of its own, said Andrew Brust, chief of new technology at twentysix New York, a New York-based IT consultancy.

"Microsoft is saying partners can make money first and foremost by adding value to its base offering, and by helping them sell the platform, they'll reward you again," said Brust. "That's a great approach if it works because it's the model the partner system is based on now."

While Microsoft's services model will take away from partners' revenue, the channel needs to realize that the new model will create additional opportunities, said Matt Makowicz, principal at Ambition Consulting, a Somerset, N.J., solution provider.

"We can debate how much revenue Microsoft is taking away from partners, but the reality is that services moving to the cloud is inevitable," Makowicz said. "The partners that are going to struggle are ones that don't adapt to change well."