Microsoft's SaaS Strategy Leverages Telcos

by Jeffrey Kaplan

September 5, 2006 —

Nearly a year ago in this space I suggested that telecommunications carriers were positioning themselves to deliver a new generation of utility computing services (Telcos jump into utility computing). At that that time I focused on the telcos' efforts to expand their managed services aimed at assuming greater responsibility for customers' network, security and storage management requirements. More recently, the telcos have set their sights on the application layer with a new round of offerings that venture into the Software-as-a-Service (SaaS) market.

The latest example of the carriers' expansion into this segment of the market came with the announcement that Verizon will be reselling Microsoft's rapidly evolving Windows Live solutions in 2007. The announcement is an outgrowth of an alliance that has been in place since 2002.

As a result of their joint announcement in August, Verizon's digital subscriber line (DSL) and fiber optics service (FiOS) subscribers will now have access to a co-branded Microsoft Live.com homepage, Windows Live Search capabilities, Windows Live Messenger, Windows Live Mail, a Windows Live Toolbar and Windows Live OneCare computer safety scans. The new services replace the MSN Premium services and McAfee security software currently offered by Verizon.

This announcement has several significant implications:

First, this is just the first of a series of similar announcements that you can expect to see from Microsoft and other telcos aiming to deliver a new set of 'value-added' services on top of their traditional voice/data transmission offerings.

Second, expect Microsoft to expand its portfolio of Live services to include customer relationship management (CRM) and other business-oriented applications that are increasingly being delivered via the Web by an assortment of SaaS providers. If the telecommunications carriers succeed in selling the first round of Live services to small- and mid-size business (SMBs), Microsoft will make an effort to push its next round of business applications through this channel as well.

Third, the line of demarcation between the traditional voice and data sides of enterprise organizations is blurring because of the advent of Internet protocol (IP) technologies. This opens the door for organizations to consider a broader array of suppliers to satisfy their needs.

Fourth, and finally, given today's economic climate, organizations of all sizes are seeking to reduce their IT and telecom spending by outsourcing a greater share of their operations. As a consequence, a growing number of customers are adopting SaaS and managed services so they can focus on their core businesses.

The bottom line

Microsoft is playing catch up in the SaaS market as it tries to keep pace with Salesforce.com and a myriad of lesser-known SaaS providers. Meanwhile, the telcos are trying to fend off cable operators and a revitalized group of CLECs, ISPs and hosting companies. At the same time, both Microsoft and the telcos have become easy targets for those who see them as too big, too insulated, and too wedded to their traditional products and services to respond successfully to the new generation of SaaS and managed service alternatives.

While battered and bruised by escalating competition, Microsoft and the telcos remain solid brands that many customers will choose over the perceived risks associated with working with less mature suppliers -- even if Microsoft and the telcos' solutions aren't the best available.

Therefore, the seemingly innocuous announcement by Microsoft and Verizon could have far bigger implications for the on-demand SaaS and managed services movement, and may begin to reshape the competitive landscape.

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