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Week’s Top News | Alliances | Business/Finance
Product Launches | Trends

Microsoft’s Tricky Transition into SaaS
By Andy Patrizio

May 4, 2006

Microsoft has spent the last week in a very rare circumstance: on financial defense. But that hasn’t stopped the company from pressing on to new opportunities, including ramping up its MSN ad network and transitioning into offering some of its core applications as hosted services.

For all the attention placed on its legal woes, slightly lower-than-expected earnings report, downgraded stock outlook, and recent freefall in market value, the real key for the company right now is its transition from the old ASP model of several years ago to applications as a service, according to Dwight Davis, vice president and practice director of Summit Strategies, in Kirkland, Wash.

“Microsoft has been much more resistant to pushing into the world of software as a service (SaaS), where is playing, because it holds more danger for Microsoft,” since Office and Windows make up much of the company’s revenue, he says.

“It’s a touchy thing for Microsoft to charge into without having a negative impact on its revenue. So it will promote packaged software and local deployment as the preferred mechanism for many years to come.”

The latest moves from the world’s biggest software developer come after it reported slightly lower-than-expected earnings and gave weak guidance going forward.

Microsoft (Quote, Chart) was socked with downgrades and lost 11 percent of its market value. The company lost $42 billion in market value, which is enough to buy its Seattle neighbor Starbucks.

The dip in profits was partly attributable to Microsoft’s seemingly endless antitrust court cases. Legal fees shaved three cents off the bottom line earnings per share. CFO Chris Liddell also said the XBox factor contributed to the drop, as sales of the old system dropped off while the new XBox 360, which Microsoft sells at a loss, were picking up.

Then there was the drop in sales of Windows and Office as customers anticipated new releases, due early next year.

Despite it all, Microsoft said it would increase its investments in research and development, particularly its online efforts.

That will mean short-term pain, because the company is shifting from Yahoo’s ad-serving technology to its own AdCenter. The company predicted sales to slip around 4 percent to 5 percent as it continues its transition to AdCenter.

The shift to AdCenter comes at the same time as Microsoft steps into the software as a service arena with its first hybrid offerings in the form of Microsoft Live.

Microsoft Live blends the line between fully hosted online apps, like those offers, and packaged software. Windows and Office Live give Microsoft a way to do more rapid updating of its traditional packaged apps with new functionality you can access as services.

“If Microsoft can pull that off, it gets that monkey off its back to get new features out sooner than every three years,” said Davis.

Office and Windows aren’t entirely hosted, he added. They still have to be installed on your computer, but enhancements could be offered as services, which helps keep the products current between major releases.

So while all the effort seems to be on MSN, and that’s what’s getting all the attention, Davis feels people are missing the mark.

“People have taken their eye off the ball of where the bulk of where Microsoft’s money comes from,” he says. “There, too, Microsoft has to make some changes and gravitate toward online-based services. They have to solve all those puzzles, not just the Google puzzle but the puzzle.”

It will be the R&D into online services, begun for MSN but eventually benefiting Office and other Microsoft applications, that brings about this migration, claims Davis.

It will help Microsoft go up against Google not just in search, but in its application offerings, where Microsoft has a huge library and a big advantage over the relatively new search engine company.

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