Microsoft's services picture becoming clear

Microsoft starting to tune its services message for corporate customers

An image of Microsoft's future - delivering software-as-a-service to corporate customers - finally is starting to develop, although the company and observers agree there are many challenges ahead.

That picture, while not ready to be hung on a wall, is being brought into focus by Microsoft's development of Windows Live consumer services; Office Live, which is targeted at small and midsize businesses (SMB); search technologies that meld locally stored and Internet-based data; and the recently introduced Dynamics CRM Live enterprise application service set to debut in 2007.

When they ship, the company plans to paint Vista and Office 2007 into the portrait, integrating Office SharePoint Server 2007 and Windows Vista with desktop and online search technologies, for example.

But beyond that, Microsoft is heavy on the strategy and vision.

"Today, Microsoft is doing a lot of marketing, and customers are certainly looking over their shoulders to see when Microsoft realistically will enter the [software-as-a-service] market," says Rebecca Wetteman, vice president of research at Nucleus Research. "Microsoft is a little behind the ball in the on-demand space. Having some hosted applications is not necessarily going to cut it."

R&D boost

For now, Microsoft plans to use its platform of applications and infrastructure software to enter into the world of services, and the company has earmarked an additional $500 million in its fiscal 2007 budget for R&D on Internet-based services, including software and advertising-based services like those made popular by Google.

"By embracing services in most everything we do, the potential for this company to positively impact . . . the operation of business has never been greater," Chief Software Architect Ray Ozzie said at the company's annual meeting for financial analysts last month.

Ozzie, who is replacing Bill Gates as he moves out of his day-to-day company duties over the next 24 months, is leading the charge toward what he calls the services transformation, a change fostered by powerful edge devices and centralized services - and high-bandwidth pipes to connect the two.

That transformation includes going toe to toe with Google, Yahoo and others to provide consumer and corporate online services, but Ozzie says those are only a start of a stepwise process that will see first SMBs, then large corporations adopting Internet-based services, which Ozzie says will be defined by integrating desktop-based software and server applications with online services anchored by Windows Live. Users would access those services through browsers, mobile devices or rich clients, where local applications and data are augmented by one or multiple services.

Critics say before Microsoft can make that vision a reality, it has to surmount challenges that include integrating its portfolio of corporate software into its services model, explaining differences between hosted and on-demand versions of software, avoiding a cannibalization of its vast partner community, and outsmarting a growing collection of vendors offering online alternatives to traditional software.

Where are the roots?

"Some may view what we're doing here as a big, bold bet," Ozzie says. "But frankly, it's a very natural bet for us as a platform company. Our current offerings represent a huge asset that we can migrate to our advantage into this new services world."

Although Ozzie is just the sort of forward-looking technologist to lead Microsoft's charge, he will have to change a corporate culture that historically divided up internal product development, experts say.

"He has a lot of cleaning up before school starts," Nucleus Research's Wetteman says. "He has got some different product teams and different product strategies that he needs to refocus."

The first example of that is Dynamics CRM Live, which is Microsoft's answer to Salesforce.com and other providers of line-of-business applications in the software-as-a-service model. The company plans to ship its CRM software, code-named Titan, next year. Titan will be available in three versions based on the same code, which will be tuned to run on-premises within a customer's network, to be hosted by a third party or to be obtained as a Live service from the Internet. The code also has been updated to add multitenant capabilities, letting multiple users reside on a single server.

This delivery model maps to the future laid out by Ozzie where services are additive - not necessarily replacing corporate software but offering alternatives or complements.

For example, the on-premise version of Titan will integrate with features of Vista and Office 2007, but users also will be able to integrate with Windows Live services. Developers will be able to overlay Live Local maps with customer data within Outlook, a mashup integrating Internet-based services, corporate applications and rich-client software on the desktop.

"It is not an either-or world, it is an and world," says Tim O'Brien, director of platform strategy for Microsoft. Even Microsoft is figuring out what "and" means, however: O'Brien acknowledges the services model for other Dynamics software, such as ERP, is not baked sufficiently to talk about publicly.

Microsoft concedes this kind of services model will require corporate users to weigh the trade-offs - cost vs. control, for example - but says the shift toward tapping into a services infrastructure maintained by some third party could offer cost advantages that can't be ignored.

Will it fly?

Whether large organizations will shift resources to the services model is still a wide-open question, but the scales seem to be tipping in favor of it. A recent IDC survey of 512 North America-based IT pros shows that nearly 79% have purchased or are reviewing software-as-a-service offerings. And Microsoft is proving there is some interest among smaller companies.

Microsoft's Office Live service, which launched Feb. 15 with free beta trials, already has 110,000 users, according to Ipwalk, which provides domain- and name-server data and statistics.

The basic Office Live service provides a domain name, hosting, a home page and five e-mail accounts, and will be offered free. But the cost question won't be answered until later this year when Live Collaboration and Live Essentials are released. These add-ons provide collaboration and project management tools, among other services - which will cost about $30 per month.

"I don't think Microsoft is at any constitutional disadvantage to other competitors, because this is really a young market," says Peter O'Kelly, an analyst with Burton Group. "We are still in the early innings of this game."

Whether Office Live's fee-based services fly will help determine to what extent Microsoft is a player, experts say.

But make no mistake, the company is attacking the problem from all angles and from the bottom of the organization to the top.

Microsoft's stake in online services may have been summed up best late last month by CEO Steve Ballmer when he told financial analysts, "I'm probably spending more time today with advertisers than I am with enterprise customers, and I'm certainly spending more time with telecommunications companies, who are critical to the partnership in online services."

Service transformation Here is a look at some services Microsoft offers or has in development.
ServicesDescriptionComments
Windows LiveCollection of nearly 50 online services from search to shopping to security.Microsoft plans to make this the hub for melding its corporate software with services.
Office LiveNothing to do with Office suite of productivity applications but rather Web site hosting and tools for small businesses.Ongoing trial is popular but reality of its appeal will arrive when fees kick in at the end of the year for some services.
Office Live MeetingWeb conferencing service.Product of an acquisition that is being tied to corporate collaboration platform.
Exchange Edge ServicesE-mail hygiene service.Also acquired and being tied to corporate messaging platform.
Dynamics CRM LiveFirst corporate application slated for services model. Release scheduled for mid-2007.Newest offering of software that also is offered in an on-premise and hosted version.
Excel ServicesPopular spreadsheet will be paired with back-end server for file sharing with Office 2007.Integration of Excel with SharePoint Server in model that is more hosting than services.

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