Microsoft Inside

USI finds partnership paying off

When Microsoft rescued USinternetworking with a $50 million equity investment last November, the software vendor wasnt just shopping for an underpriced asset. Instead, Microsoft was buying a potentially potent distribution channel for its .Net services initiative. It was a role USi was ready to play.

"We were always a Microsoft partner, but we were less Microsoft-centric prior to the investment than we are today," says Matt Howard, vice president of business development at USis Microsoft Alliance.

A Microsoft platform is now the default option for USi customers using applications, for example, from PeopleSoft, though they can still opt for Unix and Oracle products instead. "We are there to support customer needs and to be a good partner to Microsoft," Howard says.

Application service provider customers tend to buy service brands instead of technology brands, he says, and Windows 2000 is the fastest-growing operating system at USi.

The partnership with Microsoft, which includes a joint sales and marketing agreement, is also driving sales at the Annapolis, Md., service provider. "It has absolutely brought us business," Howard says. "They may refer us along with other ASPs, but at least we get invited to the dance. The equity investment was important, but the sales and marketing may be more so."

Simon Angove, senior director of product strategy at another Microsoft ASP partner, Cable & Wireless a-Services, says the channel strategy is a must if .Net is to succeed. "Microsoft doesnt have a core competency in services, so were a new channel along with the value-added resellers and [original equipment manufacturers] they have used," he says.

Microsoft has granted its highest-level certification to a-Services, in which it is not an equity investor, and to USi. The company also has relatively minor investments in ASPs Interliant, which recently bailed on its own full-service offerings, and Corio.

For Air Cargo, a ground services company owned by the major domestic airlines, USis close relationship with Microsoft was a key reason for choosing the ASP to host an electronic commerce system and cargo tracking system scheduled to go live this quarter. "It wasnt just the equity investment, because Ive seen deals where that didnt make a difference," says Jack Downing, director of information technology at Air Cargo. "They demonstrated that a well-functioning relationship was in place."

One early market opportunity for Microsoft ASPs lies with Microsoft customers that use only some of their licensed capabilities. "A customer who still runs Lotus Notes and an Oracle database because they lack the funds or the expertise to migrate would find us deployment-friendly," Howard says.

A tighter focus on Microsoft could also help USi by cutting costs and increasing efficiencies. "If USi begins to standardize on Microsoft, it should enable them to become more efficient and gain greater repeatability at the operating platform level," says Bill Dering, an analyst and managing director at C.E. Unterberg, Towbin. "Greater repeatability means they can manage more servers with fewer people and deploy the same number of servers in a faster time frame. All of this is a good thing."

Improved customer service is another potential payoff. "Service businesses are entirely about brand awareness and customer reference stories," he says.

The progress of .Net should benefit USi and its customers. "A set of software and a general development platform geared toward a hosted environment should only help USi optimize much of the software it is using for a hosted environment," Dering says.

Microsofts equity stake, part of a $300 million financing package, kept USi afloat but hasnt done much for the stock price, not only because of general market conditions, but also due to the deals dilutive effect. USis market capitalization has been roughly $250 million of late, and Legg Mason downgraded the stock this month.

Last week, USi reported a first-quarter loss of $45.4 million on revenue of $36.7 million, and announced a restructuring and layoffs of up to 25 percent of staff. The company reduced its growth target for this year but said it plans to reach breakeven on an operating level in the third quarter.