Microsoft Plays Catch-Up with Nimble On-Demand Rivals

By John Pallatto  |  Posted 2005-11-04

Microsoft Plays Catch-Up with Nimble On-Demand Rivals

Executives who head a variety of software-as-a-service businesses say that Microsoft Corp. has no choice but to move deeper into the on-demand software business or possibly face being outmaneuvered by a host of smaller, more nimble competitors.

Microsofts introduction this week of Windows Live and Office Live is just the first tentative step that the company is making in response to the competitive challenge posed by on-demand software, the executives said.

Microsoft cant afford to be late responding to the challenge of on-demand software services like it was with Netscape Inc.s Internet browser technology or Google Inc.s search engine, said Keith McCall, chief technology officer with Azaleos, a Microsoft partner and the provider of an Exchange 2003 e-mail application management service based in Redmond, Wash.

"I think that Microsoft will have to shift its model from one that just provides software products to one that provides both software products and software as a service," McCall said.

Microsofts initial service offerings "may be sketchy right now, but I think that theyre going to play very, very seriously in this space," McCall said.

Shifting to a combination of on-premises licensing and on-demand subscription licensing will be "key to continuing Microsofts revenue growth" because customers are interested in acquiring software and services through this model, he said.

Click here to read Mary Jo Foleys commentary on why the Microsoft "Live" services announcement didnt include a lot of significant new deliverables.

Microsoft has "to step up to provide value-added services for the IT organizations out there" or it will "run the risk of being out-competed by smaller, more nimble, more agile partners," McCall said.

But it isnt going to happen overnight, he said. "I dont believe that Microsoft yet has the assets in-house to be able to deliver line-of-business applications such as customer relationship management, sales force automation or even hosted Exchange e-mail applications" through the on-demand model, McCall said.

On Tuesday Microsoft announced Windows Live, which Microsoft Chairman Bill Gates described as an Internet-based personal services similar to its widely used MSN Web portal. It also announced Office Live, a suite of online messaging, presence, automation and collaboration applications designed to supplement the Microsoft Office suite and targeted at small to midsize businesses.

Giving customers the choice of moving seamlessly between client/server applications and on-demand services is the vision of both Gates and Chief Technology Officer Ray Ozzie, who has been given the job of formulating Microsofts services strategy, McCall said.

Microsoft has reportedly hinted that future service offerings might include a hosted CRM service similar to Salesforce.coms model or enterprise versions of the Windows OneCare hosted security services.

To read Mary Jo Foleys commentary on why Microsoft was wise not to emphasize any connection to Web 2.0 technology in its "Live" Web services, click here.

But the assets needed to build major line of business applications would have to come either from the acquisition of existing on-demand service companies "or significant investment internally. And I think they arent there yet," said McCall. "If they are serious about the live market they will buy" the assets that they need, he said.

However, Bill Heil, president of online conferencing and collaboration company WebEx Communications Inc., of Santa Clara, Calif., said he believes Microsoft isnt constitutionally capable of successfully turning itself into an on-demand services company.

The "Live" services introduced this week show that "Microsoft is way too late to the game and focused on a very small piece of the puzzle" for on-demand software services, Heil said.

Companies such as WebEx and "are built from the ground up as on-demand software companies, and we think that is the way to be successful," he said.

Next Page: Matching up corporate DNA.

Corporate DNA Tests

For Heil, success or failure in the on-demand market is a matter of corporate DNA. Microsofts DNA is that of a company that has always been structured toward building and selling client/server software.

"I think it is really hard to take a company with the DNA of a software company and turn it into a company with the DNA of a services company," Heil said.

Microsoft has been trying to get into the on-demand services business for years with less than stellar success, Heil said.

He noted that Microsoft launched its LiveMeeting collaboration service nearly eight years ago, and it hasnt come close to knocking WebEx from its dominant position in the collaboration market, where it holds a 64 percent market share compared with Microsofts share of under 20 percent, he said.

The fact that Microsoft is starting to move into the on-demand software field is perhaps the strongest market validation this business model could have, noted Louis Waters, CEO of Simdesk Technologies Inc., of Houston, which markets a suite of on-demand desktop messaging, file management and collaboration services.

The actual announcements may be less than market sharking, Waters said, and is perhaps in keeping with an oft-repeated tactic of "laying claim to the space before they are quite ready for it," he said.

But "they have signaled a clear commitment there, and theyre gearing up very quickly," he said. "Clearly with the money they spend they can deliver services whenever they want," Waters said. "But they have a huge challenge to move from the infrastructure company that they really are to a true on-demand model, which is really about eliminating infrastructure," Waters said.

The entire companys business model is geared toward maintaining a massive flow of revenue and profits generated from selling on-premises software licenses. Its difficult to see how Microsoft can adjust to the shift of even a portion of its business to on-demand where the goal is aimed in part at giving customers a way to reduce their commitment to an expensive software infrastructure, he said.

"Our whole position is that on-demand is going to change the economics of computing in a fundamental way and that the people who now spend thousands of dollars per person per year on IT should end up spending somewhere on the order of hundreds of dollars per user per year on IT," said Waters.

Microsoft has no choice but to make at least a partial transition to on-demand computing, but that transition has the potential to shake the company to its foundation, said Eric Larkin, chief technology officer with Arena Solutions Inc., of Menlo Park, Calif., which markets on-demand product lifecycle management (PLM) applications mainly for the manufacturing industry.

Click here to read why the competitive challenge posed by Google lent urgency to the formulation of Microsofts "Live" service offerings.

Larkin suggested that Microsofts position is somewhat akin to the Eastman Kodak Co. when it realized back in the 1990s that digital cameras were going to sharply cut into the demand for photographic supplies. Kodak has seen its business growth stunted even as it moved aggressively to market digital photography products, he said.

Microsoft is still in the early stages of making the transition to an on-demand business model, he said. "They still havent—at least not publicly—made the conceptual leap that what they are ultimately providing is a service not just the operation of software widgetry," Larkin said.

Just the same, "it will only be good for our business to have a major player like Microsoft touting the benefits of software as a service," he said.

Better yet, Larkin noted, at this point Microsoft poses no significant competitive threat to Arena Solutions on-demand PLM business.

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