Will Microsoft's New CEO Change The Channel Status Quo?

Microsoft partners have little doubt that new Microsoft CEO Satya Nadella has the technology chops to deliver a healthy dose of innovation to the software giant's product and services portfolio. But the jury is out on whether the 22-year Microsoft veteran is going to be willing to alter a channel program that many partners believe is heading in the wrong direction after a series of cloud computing sales incentive cutbacks.

Some of these cutbacks are small ones, such as limits on phone support, while others stand to have a huge financial impact on partners, such as the recent cloud incentive cuts for partners selling Office 365. In fact, CRN has reported that partners that sell Office 365 and other cloud services in Microsoft's Advisor Enterprise Agreement Deploy program expect to see their incentive payments drop as much as 40 percent to 50 percent.

Microsoft, Redmond, Wash., claims Office 365 is its fastest-growing product ever and that the number of partners selling Office 365 has doubled in the past year. But the way partners see it, if Microsoft values their role in making Office 365 successful, it should be increasing incentives rather than cutting them.

[Related: Channel Beat: A New CEO For Microsoft ]

Some partners initially reacted to the incentive cuts by vowing to sell Google Apps. While this sounded like an emotional response at first, some partners are now following through. CDW, one of Microsoft's top licensing solution providers and No. 8 on CRN's Solution Provider 500 list with $10 billion in annual sales, last week said it would start selling Google Apps For Business.

"At the end of the day, Microsoft partners are saying enough is enough," said the CEO of a large national solution provider who did not want to be identified. "We need to go where the money is. We are hoping the new CEO pays attention to this. He comes from the cloud business. His first statement is: mobile first and cloud first. But if you are going to lose the channel that is selling your technology I don't care how good your technology is, you will lose."

Microsoft's cloud incentive cuts come as Google and Amazon are stepping up their channel game by offering significant new incentives to partners. "Google is putting tremendous incentives out there; Amazon is building a tremendous channel," the solution provider CEO said. "They are both competing with Microsoft. In the past, we did not have those choices. The Microsofts of the world in the past were able to squeeze partner margins because there was no other choice. Guess what? Now we have choices with new incentives from Google and Amazon."

In a recent poll of solution providers conducted by CRN's Channel Intelligence Council, 34 percent said they're planning to add Google Apps For Business to their product portfolio. In addition, 70 percent of partners polled said they plan to increase their recommendation of Google Apps For Business in response to the Office 365 incentive cuts.

Industry partnerships also are threatening Microsoft's influence in the desktop PC market. Last week, Google teamed with VMware to let Windows apps, data and desktops run on Chromebooks for the first time, using a jointly developed technology they're pitching as a cost-effective option for Windows XP migrations. The technology marries VMware's View desktop virtualization software with Google Chromebooks, with access to Windows apps enabled by VMware's Blast HTML5 technology.

NEXT: Microsoft Says Nadella Gets The Channel

Microsoft Says Nadella Gets The Channel

CEOs typically don't get too hands-on in channel affairs. On Feb. 4, the day Nadella was appointed, Microsoft staged a 16-minute webcast that it pitched as an address to partners and customers. But in the webcast, Nadella didn't stray far from the talking points he outlined his email to Microsoft employees after he was appointed CEO, and several partners who tuned in told CRN they were expecting at least a cursory shout-out to the Microsoft channel.

Nadella did talk about how Microsoft partners in the PC ecosystem need to be thinking differently in the age of mobility and cloud computing. "One of the things we want to do is to make sure, in everything we do, we bring new partnerships to bear as we approach these new scenarios. And that is what I will continue to push for," Nadella said on the webcast.

Three partners who tuned in told CRN they didn't find Nadella's purported inaugural address to partners particularly useful or relevant to how they work with Microsoft. "Very disappointing. I want those 15 minutes back," one Microsoft partner grumbled to CRN after the webcast.

Dave Sobel, director of partner community at GFI Software, a Durham, N.C., Microsoft partner, sees Nadella as channel-friendly but is not expecting him to significantly alter the course that former CEO Steve Ballmer set. "I wouldn't expect major changes initially to past channel program adjustments, such as the incentive cuts, as Nadella does seem to be on the same course to "One Microsoft" as Ballmer," Sobel said.

"Immediate changes to undo previous policies don't send good messages, and even if Nadella was a strong believer, I don't think he would make those changes," Sobel said. That said, any new program adjustments in the next three to six months could provide a better indicator of how Nadella plans to work with the channel, he added.

Delcie Bean, CEO of solution provider Paragus IT, Hadley, Mass., thinks that hiring someone from outside would have given Microsoft some insight into the deep-seated problems that have entrenched themselves at the company over time. As a result, he's not a fan of the Nadella pick for CEO.

"It is going to take something dramatic for Microsoft to wake up and realize that the tech world is no longer revolving around them," Bean told CRN. "They need to stop creating products that mimic the innovations of other companies and return to creating things that are new and exciting."

Bean also thinks Microsoft's channel program has, over time, become more difficult for partners to navigate.

"They also have to realize that the complexity they have created in their partner programs and even online presence is like a tangled web that is deterring partners from working with them and, in some cases, even being able to understand what they have or how to sell it," Bean said.

Microsoft, for its part, is going to great lengths to paint Nadella as a supporter of partners. What's more, the company claims it's not cutting back on its channel investments.

"It is inaccurate to state that all Office 365 incentives have decreased," wrote a Microsoft spokesperson in an email to CRN. "We have made some incentive changes as a result of updates to product pricing and mix; yet, many of these have increased in value as changes were implemented. In fact, our overall cloud-focused incentives (of which Office 365 is a part) have doubled year-over-year in terms of dollars and a percentage of the overall incentive mix. And Microsoft provides more incentives than any other vendor in the industry."

Nevertheless, partners say they're seeing changes happening in the Microsoft channel program that haven't been sufficiently communicated beforehand. This is notable because Microsoft for years has been a rock-solid vendor partner. As a result, there's a pervasive sense -- at least among U.S. partners -- that

Microsoft doesn't see the channel as much of an asset as it used to. Microsoft can quibble all it wants with partners' concerns over channel cutbacks, but that's the perception many partners have.

Besides the channel challenges, Nadella is facing a number of technology issues that demand his immediate attention -- things such as fixing Microsoft's mobile strategy, carving out a share of the public cloud market and getting internal warring fiefdoms working together under the "One Microsoft" mantra laid out in the July reorganization. Many partners believe repairing damaged channel relations should be at the top of that list.

NEXT: Nadella's History With The Channel

Nadella's History With The Channel

Given his steady rise up the Microsoft corporate ladder starting as part of a corporate account technical marketing team, Nadella supporters said he is well schooled in just how critical partners are to Microsoft's success. He has certainly had plenty of interactions with partners.

Nadella, in fact, has been much closer to the channel over the past several years than Ballmer, the supporters said. As an executive who has worked his way up the ranks, Nadella has been on the front lines explaining why Microsoft technologies such as .Net, Bing and Windows Azure, to name a few, would enable partners to take their business to the next level.

Andrew Brust, CEO of Microsoft analyst firm Blue Badge Insights, New York, sees Nadella's appointment as a positive, describing his qualifications as "impeccable."

While Nadella is well versed on the finer points of Microsoft's culture, he also spends a great deal of time focusing on industry trends and he's not afraid to embrace technologies that Microsoft didn't develop if he thinks it will help the company, according to Brust.

One example of this came in 2011, when Microsoft decided to stop developing its big data technology called LINQ to HPC, code-named Dryad, to focus on using the open-source Hadoop instead, Brust said.

One of Microsoft's biggest challenges has been to eliminate organizational silos and get its people working more cooperatively, which is what the reorganization was meant to address. Nadella has a reputation for building consensus at Microsoft and over the years has gained the respect of engineering teams, Brust said.

"I get the distinct sense that he knows exactly what Microsoft needs to do differently to succeed, while still being true to its heritage," Brust told CRN. "With respect to CEO duties that aren't his strong suit, I expect he'll build a very strong team to help and likely rise to the occasion himself in many respects."

Chris Hertz, CEO, New Signature, a Washington, D.C.-based Microsoft partner, said Nadella is exactly the sort of technically minded executive the company needs at the helm right now. He sees Nadella as the best of the handful of internal candidates whose names surfaced during the CEO search and as someone who is more in tune with Microsoft's needs than an external candidate would have been.

"Satya Nadella is a visionary technologist in a similar vein to Bill Gates," said Hertz. "For Microsoft to succeed over the next decade, they need a leader who can drive innovation across the entire company, leverage the depth of expertise and leadership in each business and feed the superior sales and marketing engine -- including the channel -- that powers Microsoft."

PUBLISHED FEB. 18, 2014