In-Depth

A Microsoft Partner's Guide to Managed Services, Part 3: Microsoft Product Shakeup

Big changes, opportunities and challenges lie ahead with Small Business Server, Office 365 and Windows 8.

• By Scott Bekker
• August 15, 2012

Without ever uttering the words "managed services," Microsoft in July sent shock waves through the part of the MSP industry that serves small business customers with announcements that rocked products that are core to many MSP businesses.

Two of the developments -- which affected Windows Small Business Server (SBS), Office 365 and Windows 8 -- seemed positive, while one raised huge concerns.

Windows Small Business Server
The most controversial change was the decision that Windows SBS 2011 will be the last version of the product.

David Fabritius from Microsoft Windows Server Marketing announced the move on July 5 on the Official SBS Blog, calling it a significant milestone for Windows SBS.

"With the new Windows Server 2012 line up, Windows Small Business Server Essentials has been renamed Windows Server 2012 Essentials. By making Essentials a full-fledged member of the Windows Server family, we are reaffirming our commitment to delivering a flexible, cloud-enabled server platform that is designed and priced for small businesses and the partners that serve them," Fabritius wrote. "Windows SBS 2011 Standard, which includes Exchange Server and SharePoint Foundation, will be the final such Windows SBS offering. It will remain available through the OEM channel until Dec. 31, 2013, and will remain available in all other current channels until June 30, 2013."

Partners and SBS users immediately lit up Microsoft and community message boards with complaints that Microsoft was trying to force unwilling customers to the cloud. While SBS bundled on-premises Exchange and other products into the license, Essentials pushes customers to the cloud for mail and other services.

"It seems like a big mistake to me," wrote Karl Palachuk, an influential small business blogger and author. "Microsoft seems to be actively giving up huge pieces of the market where they absolutely dominate...Why eliminate a product that has been the core of a vibrant small business market? Puzzling."

Many other complaints relate to the worldwide connectivity problems, where small businesses still can't currently rely on affordable and reliable connectivity, which makes Essentials less attractive.

Given the relatively large remaining install base of Windows SBS 2003 customers and the popularity of the product, it's likely that there will be pressure from the channel to allow sales of SBS 2011 Standard beyond the 2013 cutoffs.

Meanwhile, Microsoft executives are betting that partners will warm to the change with time and more information. "Essentials is the base-level product now, and it's a phenomenal product. Then it seamlessly upgrades into all of the other [Windows Server] products," said Cindy Bates, vice president of U.S. SMB and Distribution at Microsoft, in an interview at the Microsoft Worldwide Partner Conference (WPC).

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Office 365
Far more popular with partners was an announcement from July's WPC that Microsoft will allow the broad base of its partners to bill their own customers for the Office 365 suite. The move makes it possible for MSPs to bundle the Microsoft online productivity suite with their other managed services.

The move addresses what had been the single biggest controversy in the Microsoft channel for the last few years. Kurt DelBene, president of the Microsoft Office Division, made the announcement to huge applause from the conference's 16,000 attendees during a WPC keynote.

"The first thing, which is a really big deal for us, is we're announcing today the Office 365 Open program...and the great thing is it works just like Open does in all the other products that you guys know and love. That means you guys own the top-level or the top-line revenue. It means you get to bill your customers directly for Office 365," DelBene said.

DelBene went on to explain the ramifications in terms that partners have argued about with Microsoft for several years. "It means you get to present a single package or single solution to customers, because you can take your own services and you can package that together with the Office 365 service and say, 'This is your total invoice, this is your total bill for Office 365,' plus all that value-add that you guys create," DelBene said.

From the moment Jon Roskill publicly took over as corporate vice president of the Microsoft Worldwide Partner Group at the WPC in 2010, he faced demands from partners for direct billing for the suite that was then known as the Business Productivity Online Suite (BPOS).

"Since I took this job two years ago, it's the No. 1 thing you've been asking me for," Roskill said, after DelBene's announcement.

Darren Bibby, program vice president, software channels and alliances research with the Software Business Solutions Group at IDC, acknowledges the popularity of the move among partners. "Most of them wanted to do it. They say that the billing relationship is the customer relationship."

But Bibby also says Microsoft could really open a sales spigot by allowing most partners to resell Office 365. "There could be a material boost because more partners are going to be interested in positioning it. That was a real issue before: 'Why would I position it if there's no economic value for me?'"

The Office 365 Open License will work the same way that the Microsoft Open License works today, according to Kirk Gregersen, a general manager in the Microsoft Business Division.

"We'll have a key for the service that the partner can purchase through Open. Then they can resell that to the customer, charge their own price and bill as they'd like," Gregersen says.

With direct billing, partners wouldn't get advisor fees like they currently get with Office 365. Instead, the partner would be able to bundle Office 365 with any other services and build their own margin into the solution price. For partners who do like the advisor model, Microsoft simultaneously introduced incentive changes that would give partners higher margins in most cases.

Currently, partners who sell Office 365 seats get a 12 percent advisor fee for the sale and a 6 percent renewal fee each year, for a total of 18 percent in the first year. The 12 percent fee is staying the same, and the automatic renewal fee is decreasing by 2 percentage points to 4 percent. However, partners who sell more than 150 seats get points added to the initial payout. The first year total for more than 150 seats is 20 percent, for more than 500 seats is 22 percent, and for more than 2,500 seats is 23 percent. The total seat count across customers and the incentives apply retroactively to all seats, Gregersen says.

Windows 8
The other major announcement from the WPC was that Windows 8 would be released to manufacturing (RTM) in the first week of August and reach general availability in October. (The Windows Server 2012 family, which now includes Essentials, will RTM at the same time and ship a little sooner.)

Windows 8 is a shock wave for MSPs but many don't realize it yet, according to Ray Barber, product marketing manager at Kaseya International Ltd. "Windows 8 has the potential to be another big market-shifter. There's still a huge number of PCs on Windows XP. We're coming up to the last full year of support for Windows XP, and everyone's still on it. They're going to have to go somewhere. They can't all go onto iPads and they can't all go to Mac," says Barber, himself an avid Apple user.

The manageability features of Windows 8 look like a real achievement, according to Barber, and provide excellent hooks for MSPs to be able to manage the new PCs, tablets and convertibles on customers' behalf.

"For services providers, that has been their market for the last 20 years. You need to have somebody involved to get those working and to get the most out of it. They should be excited about Windows 8," Barber says.

At the same time, the silence on Windows 8 among MSPs he meets with has been striking. "I've been trying to kick off conversations about it. Every time I do, it's clear that they're not thinking about it enough," Barber says. "We're still talking about the largest provider of operating systems on the planet."

More from This Series:

• Part 1: Success in a 'Nested Doll' Environment
• Part 2: 9 Add-On Opportunities for MSPs