Executive Summary:

Microsoft Online Services aims to save companies money by offering Microsoft server solutions as subscription services. The first generation Microsoft Online Services ships in the second half of 2008 and will consist of Microsoft Exchange Online, Microsoft Office SharePoint Online, Microsoft Office Live Meeting, Microsoft Exchange Hosted Filtering, and Microsoft Office Communications Online.

As more businesses and educational institutions turn to cloud computing–based messaging and documentsharing solutions from Google and other so-called Web 2.0–type companies, you might think that Microsoft’s traditional software delivery method—by which it licenses complex server products such as Microsoft Exchange and Microsoft Office SharePoint Server to customers— is becoming passé. Apparently, Microsoft believes this: Its latest initiative, Microsoft Online Services, aims to make some of its most popular and complex server products available to companies of all sizes as hosted services. Here’s what you need to know about Microsoft Online Services.

It’s All About Software Plus Services
Microsoft has been promoting the concept of Software Plus Services (S+S) for a while now, but until recently, that moniker sounded like more of an excuse than a strategy. But the company might be on to something. Many argue that the future of computing will be made up largely of online applications delivered through web browsers and other non-traditional means, but even if such a scenario is fulfilled, questions remain: How soon will we get there, and what will this transition period between traditional software delivery methods and cloud computing look like?

Microsoft’s S+S initiative aims to blend the best of Microsoft’s traditional software development strengths with the cloud computing paradigm espoused by its competitors. This isn’t just about protecting its traditional products, however: Microsoft is likely correct in its belief that the transition to cloud-based services will be time consuming and will likely never completely replace desktop software solutions. By combining its best-of-breed desktop products with web services, Microsoft is offering a path to the future that its customers should be comfortable with.

But what about servers? On the server side, Microsoft’s traditional offerings are well regarded but are complex to deploy and manage. And in this increasingly cost-sensitive era, many businesses are beginning to realize that self-hosting infrastructure services such as email, document sharing, and the like is often too complex and expensive. Microsoft’s solution is to offer its best-selling server solutions as hosted services aimed at businesses of all sizes. The first round of these services is now being offered through Microsoft Online Services. (Another option is also available: Customers can host certain services with Microsoft partners, as is the case with Exchange Hosted Services.)

What Is Microsoft Online Services?
Put simply, Microsoft Online Services is a set of Microsoft server solutions that are offered as subscription services—hosted by Microsoft and sold through the company’s partners. The first-generation Microsoft Online Services will ship later in 2008 and will consist of Microsoft Exchange Online, Microsoft Office SharePoint Online, Microsoft Office Live Meeting, Microsoft Exchange Hosted Filtering, and Microsoft Office Communications Online, the latter of which will still be in beta through the end of 2008. (To learn more about the individual products, see http://www.microsoft.com/online/default.mspx.) They’re backed by service level agreements (SLAs) guaranteeing 99.9 percent uptime.

David Chow, a Microsoft group product manager, tells me that Microsoft Online Services grew out of customer feedback. “Customers are concerned that they have to continue investing in technical learning and train employees for platform solutions that have nothing to do with their key strategic goals,” he said. “It’s hard for these companies to deal with the ups and downs of software life cycles, and they’d prefer to move to a more predictable model where security, reliability, and availability are all guaranteed, and they don’t have to worry about hardware, data centers, or other capabilities that aren’t at the core of what they do.”

Chow says it’s a business reality that the industry simply isn’t going to move to an all-services model anytime soon. And in Microsoft’s view, there will always be local applications that require certain levels of control, security, or customization. But even in today’s traditional software market, some businesses, such as those with branch offices, can take advantage of an S+S solution like Microsoft Online Services. And they can combine different types of solutions as needed, using on-premise Exchange servers, for example, at a main office and Exchange Online-based services at a branch office.

Microsoft Online Services offers the benefits of geo-redundant, massively scaled data centers to customers who couldn’t afford such things on their own. Management is simplified because the server software is always kept up to date for customers, who get the latest upgrades and versions automatically as long as their subscription is current. For end users, the experience is seamless: They can continue using, for example, Microsoft Outlook or Outlook Web Access (OWA) clients for Exchange as usual, with little or no disruption.

One of the more intriguing scenarios for Microsoft Online Services is the ability it offers customers to mix and match. Larger customers, for example, might want to utilize a combination of locally managed servers with Microsoft Online Services servers. This can be temporary— as would be the case in a migration from older Exchange servers to Microsoft Online Services— or permanent, as with the branchoffice scenario outlined earlier. Part of the value of Microsoft Online Services is Microsoft’s related tools, which include directory synchronization—for syncing local Active Directory (AD) with Microsoft Online Services—and content- migration tools, which let you move mailboxes and other Exchange data from local servers (as far back as Exchange Server 5.5) to Microsoft Online Services-based Exchange.

There are no size limits with Microsoft Online Services, either, Chow tells me. The service scales from a five-user license on the low end up to the needs of any multinational corporation. Microsoft will offer two versions of the service: a standard version with shared infrastructure that will scale according to the needs of customers and a dedicated version that provides dedicated infrastructure. The dedicated version is designed for corporations with 5,000 or more users. “We pretty much cover the entire market,” Chow says.

What About Partners?
One of the difficulties in moving to this new model is that it appears to cut out Microsoft’s traditional partner opportunities. Not so, Chow says. Instead of bypassing its partner channel, Microsoft is adopting a new partner business model for Microsoft Online Services that should provide a wealth of new customers—70 percent of sales are expected to be new customers—and an ongoing revenue model for partners.

Here’s how it will work: With Microsoft Online Services, Microsoft’s partners will have to move from low-margin, projectbased revenue streams to revenue streams based on high-margin services. New opportunities will come from SharePoint consulting, online migration, and online integration, but the ongoing revenues will come from a new service-advisor fee structure. Microsoft’s partners will receive 12 percent commissions on new Microsoft Online Services customer sales in the first year and then six percent every year after that. This ongoing revenue stream will encourage partners to maintain relationships with customers and up-sell them on related products and services.

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What Will It Cost?
Obviously, Microsoft Online Services will need to be cost-effective for customers to embrace it, but when you compare its costs to the costs of maintaining the individual servers and employing the people needed to do so, it becomes clear that Microsoft has at least reached a logical starting point. The monthly licensing fee or User Subscription License (USL) for the entire Microsoft Online Services suite is $15 per user per month, with reduced costs according to volume. Customers can also opt to license individual services. Exchange Online Standard, for example, is about $10 a month and SharePoint Online is $7.25.

Microsoft is also offering web-only USLs with reduced capabilities. These so-called Deskless Worker licenses will cost $3 per month for the entire suite and $2 each per month for the Deskless Worker versions of Exchange Online or SharePoint Online. One obvious limitation: With a Deskless Worker license, the user can access Exchange only via OWA, not Outlook.

When Will This Occur?
Microsoft will ship the initial version of Microsoft Online Services in the second half of 2008. This will include US versions of Exchange Online, Office SharePoint Online, Office Live Meeting, Microsoft Dynamics CRM Online, and a beta version of Office Communications Online. In 2009, Microsoft will provide Microsoft Online Services to customers internationally and ship a final version of Office Communications Online. The company is also preparing to add to the Microsoft Online Services product line, though it’s not saying what it will add.

Recommendations
Although I know some companies will need to host certain servers internally for regulatory, legal, or other reasons, I feel that externally hosted services are the future of business computing. This argument runs right to the heart of the “Does IT Matter?” discussion raised by Nicholas G. Carr in his book Does IT Matter? Information Technology and the Corrosion of Competitive Advantage (Harvard Business School Press, 2004). The move to cloudbased services won’t diminish our reliance on Microsoft servers or change the need for IT pros to be fluent with these products. But it will change how we access these technologies. The future of computing is distributed, and Microsoft clearly understands that. If you’re on the fence about self-hosting any of the servers included in Microsoft Online Services, or are worried about future upgrades and migrations, you should investigate this solution. It signals a sea change in the way that enterprise-class server solutions are delivered to companies and their employees.