Microsoft Pushes on Hosted Software

(MoneyWatch)  Microsoft is trying to crank up the hosted software front because it has to. The company has been in a quandary for years, trapped by its own success, with roughly 80 percent of its sales still coming from Windows- and Office-related software. That means the corporations and its investors have to wait for those exciting money infusions until there is a new version of something to sell.

Heaven knows that the people in Redmond haven't been too swift in shipping major upgrades. That means a whole lot of pressure is put on getting the code out the door, which helped create the old advice to avoid any "dot zero" Microsoft release, because they were too eager to get the code out the door to catch all the problems.

To be fair, this is a problem the entire industry has faced since the first day a company actually sold a box of code instead of leasing it. Forget annuities -- companies had to talk people into buying one upgrade after another, which has also helped create bloatware, that software filled with unnecessary crap designed to convince people to pay yet again for the same capabilities they already had on their machines. Ah, but selling hosted services, whether you call them SaaS or ASP, can mean continuing revenue:

On Tuesday, Microsoft said it will sell a package of four server products -- Exchange Online, SharePoint Online, Communications Online and Live Meeting -- to U.S. companies by the end of the year for $15 per PC user per month, and to global businesses in the first half of 2009.

The company also plans to sell a lightweight version that gives limited e-mail and Sharepoint access to "deskless" workers like nurses, factory employees and salespeople for $3 per user per month.

Not that every report is quoting exactly the same numbers.

As expected, Microsoft is pricing its Online services aggressively. Currently in beta and due to launch sometime later this year, Exchange Online will be priced at $10 per user/month; SharePoint Online will be $7.25 per user/month; Office Communications Server Online will be $2.50 per user/month; and LiveMeeting will be $4.50 per user/month. Microsoft will offer these services in one-year automatically renewing agreements.Microsoft is also selling a bundle of Exchange and SharePoint services with basic functionality for $3 per user/month, to meet the needs of workers who only spend a fraction of the day in front of a PC.

Even if the $15 is right, though, that's $180 per user per year per user , which is serious money when added up over tens and hundreds of thousands. The argument is that IT departments save lots of support costs and maintenance because everything is controlled and delivered through the vendor's servers. I have full faith that any company capable of snarling my PC with their products is also capable of putting the hammer on big servers.

There's another complication. Microsoft says that it wants to make these sales available through their distribution channel. (If they didn't, things would get pretty ugly.) However, Microsoft's offer is a good deal less generous than those channel partners might like.

"Twelve percent is not enough," said one partner, who asked to remain anonymous. "To give partners a real incentive to resell these services, the margins on services has to be huge. Why? Because we're spending all this money to locate and qualify leads, and with no support or other middleman revenue. Basically, we're just handing the customer to Microsoft."

Some think that this may be a sign that the company is finding the delivery of such services more expensive than management might have expected.

Not only are the margins low, but Microsoft wants to co-own the customer relationship, which is a worry to the distribution chain. What's to keep the company from eventually taking the relationships direct and freezing the partners? Not a whole lot.