A rich man's game?
Recent changes in Microsoft's pricing could lead to a survival-of-the-fittest showdown among the vendor's hosting partners. Resellers must choose their partners carefully
Resellers have been warned to brace for carnage in the Microsoft hosting arena as the vendor's Office 365 and service provider licence agreement (Spla) prices head in opposite directions.
Microsoft's direct cloud proposition suddenly became more appealing in March, when the vendor slashed its UK Office 365 prices by up to 20 per cent. The basic package - which comprises Exchange Online, Lync Online and SharePoint Online - now stands at just £5.35 per user, per month.
In contrast, the Spla model will become less competitive from December, when UK prices will hike by 25.9 per cent. This is bound to turn the screw on the small army of hosting providers that purchase Microsoft software through this model.
Microsoft partners looking to leap into the cloud game have the option of building their own infrastructure, becoming a Microsoft 365 agent, or teaming up with a hosting provider or syndicator. The first option is prohibitively expensive. While the second option may cut out the middle man, the margins are undeniably thin and the reseller must hand over billing to Microsoft. They may also have concerns over offering a single-vendor solution.
This leaves just the third option. But with only the largest wholesalers likely to emerge unscathed from the double pricing whammy, resellers have been warned to choose their hosting partners carefully.
Pick the host with the most
Chris Baldock (pictured), managing director of Inty, predicted that the market for wholesaling Microsoft services would boil down to just a small handful of players over the next 24 months. Only those doing big volumes that can circumvent the Spla model -including Inty - will survive, he argued.
"Microsoft's [cloud] offerings are just unbelievable now," he said. "The whole messaging and collaboration stack of Exchange, Sharepoint and Lync is a phenomenal proposition, backed by a huge marketing push. The recognition for cloud-delivered services in the SME space - which is served by the channel - is extremely high. The rub is that channel partners have to make a decision about how they service those products from Microsoft."
Baldock said the wholesaler's cost base will come down to several factors, including the licensing model it uses, ie Spla or HVS; its infrastructure costs, which are based on volume of users; and whether or not it has its own security wrap and control panel.
"The combination of these four factors will tell you very quickly what the middleman can deliver," he said. "Channel partners starting to exploit cloud that pick the wrong partner will see their business stalled."
Paul Hannam, chief executive of Cobweb - another Microsoft HVS partner - agreed that smaller hosting providers would find it increasingly tough to compete. The firm offers Hosted Exchange 2010 from a dual datacentre, with anti-virus and anti-spam, for £3.29 per user, per month.
"It is tough if you are having to sell it for £5 or £10 a month," said Hannam. "To be competitive in this field you need a certain volume otherwise your costs are too high to compete."
End users moving to the cloud now expect a higher level of service, Hannam added, meaning hosters must make a hefty investment in dual datacentres to stay in the game.
"The costs are ramping up and I cannot see a lot going down that route if they are doing fewer than 100,000 units," he said. "We launched Hosted Exchange more than 10 years ago, when hosting was still seen as a bit off the wall. Google and Microsoft have legitimised the market, which has brought in more conservative buyers that demand a higher level of service."
Hannam said Microsoft's Spla and Office 365 price changes had made it "very unpopular" among smaller hosters but had benefited Cobweb. "We grew 37 per cent last year in mailboxes and we will do the same again this year," he added.
James Griffin, director of product strategy at Microsoft Spla partner Outsourcery, which serves about 250 UK partners, disagreed with Inty and Cobweb.
"I agree that resellers have to choose their hosting partners carefully, but that has always been the case. Where this price increase really bites is at the commoditised end of the market, and we would never advise our resellers to play in a highly competitive, low-margin business. We are advising our resellers to look at higher-value, higher-margin services that are more strategic to their customers, such as Lync, so it becomes less of a price conversation."