Microsoft steps up on SaaS with hosted apps for large users

Microsoft steps up on SaaS with hosted apps for large users

Software vendor tries to buck small-company trend with on-demand offerings

Microsoft is taking direct aim at enterprises with its new Online family of applications, opposing conventional wisdom that smaller companies and consumers are the main targets for Software-as-a-Service (SaaS) technologies.

Conventional wisdom holds that small companies, not big ones, are embracing software-as-a-service (SAAS) technologies. Until now, Microsoft's tentative forays into the SAAS arena -- such as its Windows Live, Office Live and Dynamics Live CRM services -- have focused on consumers and small and mid-size businesses.

The software vendor has officially begun selling hosted versions of its Exchange e-mail server and SharePoint collaboration software as well as a new product called Office Communications Server that supports so-called unified communications capabilities. Microsoft will also make available a SaaS version of Forefront, a security tool that supports both Exchange and SharePoint.

Only customers buying licenses for 5,000 seats or more will be eligible to purchase the new SaaS offerings, according to Eron Kelly, director of product management in Microsoft's business online services group.

Kelly said Microsoft will offer rebates of between 25 per cent and 100 per cent of the subscription fees it charges if service-level agreements aren't met.

For several years, the company has been running pilot programs with a few large customers. One of those piloted services, a desktop management offering based on Microsoft's Systems Management Server software, remains in incubation.

On-demand applications, such as's customer relationship management software, have won business from many small companies because of the speed of deployment and the low upfront investment needed.

But large companies, especially those whose stock is publicly traded, often operate under stricter regulations that make it trickier for them to let software vendors store their data off-site.

Others have been put off by the way that SaaS subscription fees, which may look cheap with a small number of employees, can quickly add up when tens of thousands of workers are involved. Hosted software tends to make the most economic sense for companies with fewer than 1,500 users, according to Michael Osterman, an analyst at Osterman Research.

Yet SaaS can make sense for companies with as many as 30,000 users, Osterman said, such as in a large company that needed to install copies of a particular server-level software product at each of its branch offices. A company with employees who require various expensive, niche features also might do better with hosted applications, he said.

Chris Alliegro, an analyst at Directions on Microsoft, said other enterprises might simply be frustrated by the cost and complexity of running those services in-house. "[Such users may] figure that Microsoft must know how to do it better [since they built the products] and be happy to write a check to make the headaches go away," Alliegro wrote.

Microsoft declined to reveal its prices for the hosted offerings. But Alliegro said he doesn't expect enterprise SaaS to be a hugely profitable business for Microsoft. He thinks it may be more of a defensive move on the company's part to keep existing customers interested in SaaS from defecting to rivals such as Google.

Another reason Microsoft is targeting large users is to avoid competing with its own growing network of hosting partners, which are mostly attracting smaller companies.

But Microsoft still risks antagonising large resellers and systems integrators, which generally prefer to sell and support on-premises software because of the greater upfront revenues and the increased upsell opportunities that it tends to generate compared with SaaS.

Kelly wouldn't say how aggressively Microsoft plans to market the hosted services or if and how it plans to keep large business partners in the sales loop, as the software vendor is doing with Dynamics Live CRM.

"The program certainly seems to have worried some big partners, who are probably aggravated that Microsoft seems to be reinventing a lot of stuff they already do," Alliegro wrote in his email. "But until Microsoft says something more formal about how partners plug in, make money, etc., it's hard to say how good, bad or indifferent managed services is from a partner's standpoint."

The Microsoft Managed Solutions team that has been testing the new SaaS applications is being folded into the company's Business Division, where virtually all its application software is produced.

Although Microsoft continues to deny that it plans to offer a hosted version of Office, it has confirmed that it is working on SaaS releases of nearly every one of its server-side software products. Asked about further offerings, Kelly said: "Stay tuned."

Microsoft is also releasing an updated preview of a hosted version of BizTalk Server, its business process management software. The company said pricing and a release schedule will be announced by year's end.

Also, Microsoft announced a beta release of Office Live Workspace, a free repository where individual users can store up to 1,000 Office documents online and share them with other people, including for collaboration. Users can sign up for the English-language beta on Microsoft's Web site.

For now, Workspace doesn't offer the full-fledged online document creation capabilities of Google Office or ThinkFree's namesake online service. Microsoft is also facing increased competition from the likes of Adobe Systems, which Monday announced that it is buying online word-processing software maker Virtual Ubiquity and that it is releasing a beta version of an online document repository called Share.

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