Philbert Shih, Tier1 Research

April 17, 2008

T1R recently had a chance to attend the Microsoft Hosting Summit, an annual event in Bellevue, Washington, that Microsoft holds for its hosting partners. The event is set up for Microsoft to present its vision and product roadmap to partners, offer technical and marketing advice, and maybe most importantly, provide a venue where partners can reach out to Microsoft and express various concerns and trade ideas – somethin1g not to be overlooked, given how much feedback from the hosting sector goes into Microsoft's product development. Needless to say, the event is a chance for Microsoft to reiterate its commitment to the hosting sector, which was done in convincing fashion in both formal presentations and the many conversations taking place at the event and its related social gatherings.

In terms of the product road map, there were no real surprises. Microsoft has rebranded a few products and already announced its direct services strategy with Exchange Online. A couple of hints, however, were dropped that foreshadow future product rollouts. One of these was a cloud-type initiative and the other is some sort of hosted productivity application suite (Office online?), both of which will be made available to hosters (and with details on how revenue will be shared) later this year. The cloud-type initiative will clearly be interesting, as hosters continue to concern themselves with the challenge emerging from Amazon and now Google and others. The topic dominates discussion at many events T1R attends and hosters are actively looking for a way to compete. Microsoft believes it will have an answer and we will track this in the months leading to a formal launch.

The partner versus competitor issue

This issue was expected to be a main topic and T1R recalls the tension this caused last year. But, in a bit of an upset, it did not seem to be that huge. With a few months to digest what many have seen as inevitable, T1R got the sense that much of the partner channel has accepted it and is ready to move on and face the new challenges Microsoft's shift in strategy entail. Credit Microsoft for doing a good job here. Last year and at other industry events, Microsoft has been vague and unclear about its strategy. This has caused frustration among partners and created some of the above-mentioned tension. It is not entirely Microsoft's fault. We understand that management has its hands tied in certain ways, but the official launch of its direct service strategy has coincided with a clear and transparent messaging to the sector. Whether one is happy with what Microsoft is doing is not really the point. It has articulated its strategy and demonstrated where it sees hosters fitting in this value chain. Overall, a much clearer and transparent voice was apparent and T1R got the feeling that hosters were receptive. The partner channel seems to be have turned the page and is taking a 'we'll give it a try' approach.

Microsoft's vision is pretty clear. It is nudging the hosting channel up-market and into segments where it does not plan to play (at least for now, we suspect). Software as a service is clearly a big part of this. It also wants to push hosters into the layer of value emerging around hosting services, such as with Exchange and things like mobile services, security, compliance and archiving. This is a nice sweet spot for hosters and they would be wise to move here quickly.

Interestingly, there seems to be little if any discussion about Office Live Small Business, which is a more traditional Web hosting offering (though it comes in flavors that pack a bit more value) that also competes directly with hosters. OLSB preceded Exchange in coming to the market and initially spooked much of the mass-market hosting community. Those fears do not seem as intense these days and our feeling is that this is a positive sign – not because the Microsoft offering is weak, but because it appears that hosters are quickly moving away from the commoditizing segment of the market. There seems to be a broad acceptance of the need to move up the stack (as evidenced by the enthusiasm over Exchange) and deliver value around basic commodity hosting services. This is a healthy development for the sector and its great for Microsoft, not only because this is where they want to push its partner channel, but because partnering with Microsoft is an excellent way for hosters to get equipped with the platform and technology they need to head in this direction.

Overall, Microsoft got what it needed out of this event. It opened up lines of communication with its partner channel and got over the hurdle of the partner versus competitor issue. With its channel on board, it can focus on development, which it will need to excel at to meet the myriad challenges facing the sector.

Some random facts

The Microsoft hosting segment is still growing at about 40% Y/Y and is apparently somewhere over a half billion dollar business, but not quite at $700m. We'll take $600m as an estimate.

(Source: Tier1 Research)