Cloud Application Commissions: Do They Even Matter Anymore?

The cloud apps market may be a growing business, but it's not because of lucrative commissions or juicy margins -- it's the services.

Low or decreased licensing fees for cloud applications have frustrated many resellers lately; Microsoft partners, for example, fumed recently when the software giant cut its Office 365 commissions. But while cloud app licensing fees are nice because every dollar helps boost the already low margins for such products, solution providers say they're not counting on those dollars to drive their businesses.

"Trying to make money by selling just cloud apps licenses is like trying to make money selling PCs -- there's no margin there," said Jeffrey Lee, CTO of Carceron Systems. "Offering cloud apps [with low commissions] is just another thing you have to do to survive in this business these days."

[Related: XChange: How To Turn Your VAR Business Into A Cloud Business ]

Carceron Systems, a cloud solutions provider based in Atlanta, offers both Office 365 and Google Apps, but the company said it doesn't rely on cloud apps commissions to support its business. Instead, the vast majority of Carceron's revenue and margins are generated by its own services. As a result, Microsoft's recent cut in Office 365 commissions didn't bother the solution provider.

"We absolutely don't count on Office 365 commissions," said Carceron CEO Chad Massaker.

That said, Carceron still views Office 365 as an important component of its business because it helps the solution provider get a foot in the door with clients looking to move to the cloud. And because that move often starts at the application level rather than wholesale infrastructure conversions, Office 365 is a valuable product to offer clients.

On the Google end of the cloud apps spectrum, resellers aren't overly concerned with license fees -- but the partner experience has been a bit different. Allen Falcon, CEO of Cumulus Global, a Google Apps Premier SMB Reseller based in Westborough, Mass., said he's been primed since the beginning not to expect much in the way of margins and commissions for Google Apps and to concentrate on related services. And because those license fees started out low rather than being lowered over time like Office 365 commissions, Google hasn't incurred the same kind of angst from its partners.

"Google is approaching the reseller community differently," Falcon said. "What Google has said from day one to its resellers is: Make your money on the services, and we'll give you a respectable amount on the licenses. They kept it simple and clean and lean."

Alex Brown, founder and CEO of 10th Magnitude, is familiar with both sides of the software coin, having owned and operated a traditional software reseller for many years before starting his own cloud solution provider venture in 2010. 10th Magnitude has a sizeable cloud software business around Microsoft's Windows Azure and customer cloud apps development, but the company isn't planning on getting into the Office 365 business any time soon.

"We have some partners that are already in that business, and we don't want to compete with them," Brown said. Even though he's not in the cloud apps reselling business, Brown still thinks it's a viable business even with the lower licensing fees. "The commissions do matter because you can make some money on reselling cloud apps and I know a kit of VARs that do that well," he said. "But it's very similar to the classic reseller sales approach for traditional software, and we've gone in a different direction because the real allure of the cloud model is selling services."

One thing that cloud apps resellers do value over license commissions is ease of use. Last year, Microsoft introduced Office 365 Open, which allows partners to control the billing for enterprise customers, and also made Office 365 available through distributor partners like Ingram Micro, Tech Data and Synnex.

"Once Microsoft wised up and started opening up Office 365 through distributors, it's been a lot easier to sell," Massaker said.

Still, solution providers are keenly aware that even with the word "cloud" attached to applications these days, the product margins are thin and they must rely on their own services to keep the business growing.

"Whether you like it or not," Brown said, "product margins are going away -- and they're not coming back."

PUBLISHED MARCH 7, 2014