Hosting providers have warned that the low prices Microsoft charges end users for using its Software-as-a-Service (SaaS) offerings could spell disaster for smaller channel firms.

The software giant’s Business Productivity Online Suite (BPOS) provides users with access to cloud-based versions of Microsoft Exchange, Sharepoint, Office Live Meeting and Office Communications.

End users can purchase these services individually or as a package direct from Microsoft, via a BPOS reseller or by signing up with one of the vendor’s hosting providers.

However, the price Microsoft charges customers that buy the services direct from them was slashed last November, putting the firm’s network of hosting providers under increased pressure to cut their prices too.

Paul Hannam, chief executive of Microsoft hosting provider Cobweb, confirmed that his company had reduced its charges in response to the vendor’s decision to halve the monthly per user price of Exchange Online from £6.69 to £3.36.

“We provide hosted Exchange for £3.29 now, because we are in a position where we can undercut Microsoft on a like-for-like basis,” said Hannam. “For the smaller hosters, it is not so easy to do.”

As a result, Hannam said he feared the hosting provider landscape could change dramatically in the future.

“I think we could see some natural consolidation in the market,” he said. “Some of the smaller providers might decide to resell Exchange instead, either by partnering with Microsoft or with another hosting provider.”

Ben Crouch, product manager at Microsoft hosting provider Star, claimed that he has already seen signs that the number of hosting providers might be on the wane.

“For smaller players, they need to be putting more than 1,000 seats on the platform to get a return on their investment,” he said.

“As a result, we have certainly seen an increase in hosting providers moving to Star to resell services under our name and our white label service.”

Value added

While it is important for hosting providers to be in the "same ball park” on price as Microsoft, said Crouch, those that cannot should focus on providing additional services that support BPOS to make themselves stand out.

“We view email as a commodity and look for ways that we can add value on top by including anti-virus and collaboration tools,” he added.

“The BPOS package is quite vanilla on its own, so anything providers can do to enhance and add value to the user experience will help.”

This is a view echoed by Adam Smith, a director at hosted Exchange provider xe2, who doubted that Microsoft’s price cuts will lead to a mass exodus of smaller hosting providers from the channel.

“There are some players who think the competition all comes down to price issue, but the level of service is just as important,” he said. “Not all of those that deliver on price can deliver on service too, which is reflected in their customer retention rates.”

Rob Lovell, chief executive of cloud computing specialist ThinkGrid, said he would not be surprised if Hannam’s vision of the future came true and that the channel should be cautious about partnering with firms that lack experience in cloud service delivery.

“It is becoming more and more critical for resellers to take a stand right now and combine their experience with vendor-neutral cloud platforms to create far more compelling cloud offerings for customers,” said Lovell.

“Vendors like Microsoft simply do not have a track record in this model of service delivery and if they decide to pull out because the model impacts on other revenue areas, customers will be left hanging."