Analysis: Microsoft Buys into the Cloud

With its recent software-as-a-service announcement, Microsoft shows that it’s finally accepted the power and inevitability of the cloud—and also reveals just how big a threat Google really is.

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Microsoft executives said on Monday that the world’s biggest software company will begin offering online software services to “businesses of all sizes.” The “software plus services” strategy, as Microsoft execs have referred to it, has been a long time coming, and it appears that there will be many months before the much-hyped vision becomes everyday reality for all corporate IT departments.

The new services, which will allow businesses to access e-mail, calendaring, contacts, shared workspaces, Web conferencing and videoconferencing over the Web, won’t be generally available until the second half of 2008, according to Microsoft. Beta testing for small businesses with fewer than 5,000 employees opened this week.

Analysts such as Matthew Cain, a research VP at Gartner, say that the shift in Microsoft’s strategy (adding a cheaper software-as-a-service option that could cannibalize its on-premise software cash cow) is huge. “This emphasizes a titanic shift in the way that enterprises buy, provision and consume software services,” Cain says. “There really isn’t much bigger news than this.”

Back in September 2007, Microsoft announced the “roadmap” for its software services strategy and introduced its Online Services offering for businesses with more than 5,000 users. Cain notes in a recent Gartner report that while the SaaS model, in general, is in its infancy, “it holds considerable appeal, particularly for small and midsize businesses. This is because it offers fixed monthly fees, freedom from most operational management, elimination of upgrade responsibilities and, in some cases, lower costs.”

Jeff Raikes, president of Microsoft’s Business Division, kicked off the festivities in September by proclaiming that the “new era of connected computing is about empowering people and businesses to balance the power of the Internet with the rich interactivity and high performance of client and server software.”

This was a new and different Microsoft. This was also a scared Microsoft.

The Cloud Hanging Over Redmond

Amid all of Microsoft’s “enterprise customers will now have more choice” rhetoric as of late, it’s critical to note the motives behind Microsoft’s moves: responding to rising competitors and a need to play defense.

“If Google didn’t exist, Microsoft wouldn’t be doing this,” Cain says. “Why would Microsoft want to change a great thing? They would rather prefer to get revenues from their on-premise [software] model.”

Ravi Agarwal, CEO of GroupSpark, a provider of hosted applications including Exchange, SharePoint and others, told Computerworld that “it appears that this entire initiative…is driven largely in response to competitive threats from Google’s Gmail and Yahoo‘s Zimbra.”

Clearly, Google and its new set of Web-based applications have tapped into the controversial spirit of the new world order in corporate computing: Namely, that IT can’t control everything on its systems anymore, and users have become resourceful and powerful.

Google’s foray into applications is a “destabilizing force” in corporate IT environments, Cain notes. “To Microsoft’s credit, before Google has gotten a substantial market share, this was a way to respond.”

That logical conclusion forced those in Redmond to hop on board the software-as-a-service train—and before that express engine had left the station for good. “Microsoft has to be thinking that with the newly announced SaaS offering, it will take about 18 months to mature,” Cain says. “Well, where is Google going to be in 18 months? Google has shown that it can innovate at a furious pace.” And Microsoft, seeing the long-term picture and the hefty stakes, realized that if Google had an offering that undercut the Microsoft on-premise solution, then where would that leave Microsoft? “In this,” Cain notes, “Microsoft is banking on the worst-case scenario and that’s why they’re reacting this way.”

Google’s ascendance also has something to do with another desired piece of the new Microsoft: Its current $42 billion bid for Yahoo. While Yahoo’s board and management have stated that the offer (roughly $31 per share in stock and cash) undervalues Yahoo and has rejected Microsoft’s advances so far, it’s clear that Microsoft execs realize that they can’t sit back and feast on their fat on-premise software margins for much longer.

At the annual SharePoint conference in Seattle on Monday, Microsoft Chairman Bill Gates dismissed Google’s competitive threat. “They really don’t have the richness and responsiveness,” Gates noted, “and you can see that relative to the success they’ve had there.” He went on to suggest that Google usually creates a “big buzz” when it introduces a new service but fails to maintain that buzz. “To be frank,” he quipped, “the day they announce them is their best day.”

What It Means for Corporate IT

Gartner’s Cain calls Microsoft’s new strategy a “wakeup call for CIOs.” By that he means that CIOs and their IT staffs “need to become aware of Google’s presence” and figure out how and where Google’s applications and other online applications like it may fit inside their organizations. “This challenges the fundamental assertion that running software on-premise and having large staffs to operate the software is the only way to go,” Cain says.

Before anyone, whether it be Microsoft, Google or someone else, changes the face of corporate computing, however, Web-based products need to mature, Cain points out.

For Microsoft, the challenges in providing large-scale SaaS services for business “requires significant expertise in high availability, security, multi-tenant architectures, network topologies and problem resolution,” Cain writes in the Gartner report. “Furthermore, Microsoft is retrofitting its existing software to the multi-tenant server model. It won’t be until the next version of Exchange [due in 2011] that its core products are better architected to run in a multi-tenant SaaS model.”

Google’s number-one priority is to overcome the perception that its suite of apps aren’t secure or robust enough for the corporate environment.

But just how would Microsoft’s new offering and the presence of a viable Google apps offering affect internal IT operations? Cain says that “there are going to be some ultimately dramatic workforce changes as a result of the shift.” For example, running corporate e-mail systems is “drudgery,” Cain says, even though you need talented people to manage the system. “There’s not a lot of value-add to the company,” he notes.

If a company uses Microsoft to host its Exchange Server 2007, for example, then “one could contend that those staffers could focus on things that add much more value to their companies,” Cain says.

Due to its overwhelming market share and if Microsoft is able to eventually add applications such as Office to its SaaS suite, Microsoft’s endeavor will most likely prove the sports truism that “the best offense is a good defense.”

“Microsoft’s SaaS investment is both an offensive move to capture operational revenue in addition to the license fees it now collects,” Cain writes, “and a defensive measure to combat potential incursions from suppliers such as Google.”