After two years of development - and a year of speculation and posturing by the competition - Microsoft CRM has hit the streets. It might lag behind the competition in terms of functionality, but industry watchers expect that gap to narrow in future releases.REDMOND, WASH. - After two years of development - and a year of speculation and posturing by the competition -\u00a0Microsoft CRM\u00a0has hit the streets. It might lag behind the competition in terms of functionality, but industry watchers expect that gap to narrow in future releases.Microsoft CRM is aimed at companies with fewer than 500 employees - a largely untapped market, according to analysts. Gartner estimates that only 2% of small businesses and 20% of midsize businesses have adopted CRM.Winning over the small and midsize CRM market won't be easy, however. Microsoft will have to play catch-up to established CRM vendors such as Best Software and FrontRange Solutions, and hosted CRM providers such as Salesforce.com, Upshot and Salesnet."Microsoft is a big force to be reckoned with, but its [success is] not a slam-dunk," says Laurie McCabe, vice president and practice director at Summit Strategies.Microsoft's first-generation CRM product focuses on salesforce automation - contact management, lead management and forecasting - but doesn't include marketing automation or call center features.In addition, it's a tough environment for selling CRM. The worldwide CRM software market contracted by about 19% from $3.7 billion to $3 billion last year and is forecast to remain at $3 billion this year, Gartner says.In Microsoft's favor is its experience selling infrastructure software such as Windows, Outlook and SQL Server to small and midsize businesses, experts say. Microsoft also is touting tight integration between its CRM offering and its Outlook and Office applications. Built on the Microsoft .Net infrastructure, Microsoft CRM is accessible both as a browser-based application and through Outlook.Outlook and Office integration is important, given the amount of time salespeople spend sending e-mail, booking appointments and preparing sales presentations, says Kevin Scott, senior analyst at AMR Research. But it's no magic bullet, he cautions. Outlook integration is "a handy tool to have, but it's not much more than that . . . Microsoft will need to round that out to move up market," he says.Microsoft CRM requires Windows 2000, Active Directory and SQL Server, which means setup costs are higher than for a hosted CRM service, McCabe says.Initially, analysts expect Microsoft will have success selling its CRM product to users of its back-office applications, such as those Microsoft gained when it acquired ERP vendors Great Plains and Navision.Integration with these applications will make Microsoft's CRM product even more appealing, McCabe says. For this release, Microsoft integrated its CRM and Great Plains software, but that's as far as it has gotten, she says."Integration is a good story, but the reality is that it's still a work in progress," McCabe says. In terms of back-office integration, "Microsoft has as far to go as everybody else," she says.Gartner predicts that Microsoft will prevail in the end. It will be among the top-10 CRM application vendors by year-end and in the top five by 2006, the research firm says.Small CRM vendors such as Best and FrontRange will be the first to feel pressure from Microsoft's arrival, Scott says. As Microsoft grows its CRM software, it will begin to pose a threat to midsize CRM vendors such as Epicor Software, Onyx Software, Pivotal and StayinFront, "but not until the second or third generation of Microsoft CRM," Scott says.Top-tier vendors with designs on moving downstream to target midsize companies such as PeopleSoft, SAP and Siebel - might run up against Microsoft, but not in the short term.The Standard Edition of Microsoft CRM costs $395 per user plus $995 for the standard server. It's aimed at stand-alone CRM settings that don't require extensive business automation and integration requirements, Microsoft says.The Professional Suite Edition costs $1,295 per user plus $1,990 for the service and sales servers. It adds workflow rules, customization and back-office integration features.