Microsoft cuts price, still lags in CRM

When Microsoft recently began shipping its Dynamics CRM 3.0 update, it tweaked the software’s licensing structure to encourage more partners to offer the system as a hosted subscription service.

But Microsoft’s change is essentially a cosmetic one: The architectural overhaul necessary to make Microsoft a true force in the on-demand software market won’t happen until Dynamics CRM’s next update, which isn’t scheduled for release until 2007 at the earliest.

Microsoft’s launch included the unveiling of a subscription licensing option that allows its partners to essentially rent Microsoft Dynamics CRM licenses to customers for $24.95 per user, per month. The move is aimed at making Microsoft’s offering more competitive with the subscription services run by other applications vendors – most notably, Salesforce.com and Siebel. Those vendors sell subscriptions to their hosted, managed services at prices starting as low as $65 per user, per month.

Microsoft has long had a handful of partners offering its Dynamics CRM software as a hosted managed service, but it hadn’t officially offered a subscription licensing option. In most cases, customers interested in taking advantage of the partners’ hosting services had to pay upfront for licenses, which start at $622 per user for Microsoft’s Professional Edition. By encouraging partners to offer a subscription licensing option, Microsoft hopes to woo small companies that would be put off by high start-up costs.

For customers, however, the change is likely to have little real effect. One of Microsoft’s flagship hosted-CRM partners, NaviSite, already has a private deal worked out with Microsoft that allows it to offer subscription-licensing terms. NaviSite has about a dozen hosted-CRM clients, roughly 80% of whom chose to buy licenses rather than renting them, according to Mark Clayman, NaviSite’s senior vice president of service delivery.

NaviSite began offering subscription licensing last year, charging $122 per user, per month, for its hosting services and Microsoft’s license. If a customer already owns a Dynamics CRM license, NaviSite charges $99 per user, per month for hosting.

“I think there will be more interest now that it’s more widely announced. I think there will be quite a few more companies that want to try out the software rather than making the long-term purchase commitment,” Clayman says.

In addition to Navisite, in Andover, Mass., the companies currently offering hosting services for Dynamics CRM are Aspective, in the United Kingdom, and CRM Resultants, in the Netherlands. Microsoft expects to expand that list after it officially begins offering its subscription licensing terms to partners on Jan. 1, according to a spokesman from the company’s public relations agency, Waggener Edstrom. (Microsoft declined to make a company executive available for this story.)

The big hurdle for Microsoft is that its software isn’t designed with the multitenant architecture that allows providers to benefit from the economies of scale usual with hosted applications; each customer organization requires its own server and dedicated database.

That will change in Microsoft’s next Dynamics CRM update, code-named Titan, according to Microsoft and NaviSite, which has been working closely with Microsoft developers. Still, Titan isn’t due for at least another 15 to 18 months, according to Microsoft’s public relations representative, and details about what will be in that update are vague.

Until it offers multitenancy, Microsoft won’t be a serious player in the on-demand applications market, says Sheryl Kingstone, an analyst for The Yankee Group. She also thinks customers would like to see Microsoft offer hosted, subscription-priced applications directly, not just through its partner network. “There’s absolutely a demand for that,” Kingstone says.

Microsoft has sent a muddled message about how it wants to approach the growing market for managed, Web-based applications like those popularized for consumers by Google and for businesses by Salesforce.com.

Microsoft’s recently launched Live initiative and Ray Ozzie’s memo, “The Internet Services Disruption,” indicate that Microsoft wants all of its divisions to adopt a services strategy. But the company’s lagging pace in the hosted-CRM market has left it playing catch-up behind smaller, nimbler vendors.