Don’t Look Now, but Microsoft is Transforming into a Software-as-a-Service Company

If you had to venture a guess, what would you say is the fastest growing product in Microsoft’s 38-year history? Windows, Office, Xbox?

All wrong. It’s Office 365, and it’s now a billion-dollar-a-year business. It also just happens to be a subscription business — the antithesis of Microsoft’s time-tested perpetual licensing model.

I raise Office 365 as the primary example of this transformation because it was front and center at Microsoft’s Worldwide Partner Conference (WPC), held last week in my hometown of Houston.

Skeptical this transformation is under way? A few data points from WPC for your consideration:

• The epicenter of Microsoft’s technology is moving from the client to the data center. According to Mark Kashman, Microsoft senior SharePoint product manager, “The innovation we’re bringing to the cloud will come to the on-premises version afterward.” This vision is not aspirational, it’s under way today — monthly feature release cycles for Office 365, streaming versions of the newest Office productivity suite, integration between Azure (another billion-dollar services business) and the data center. All of these examples represent an epic shift within Microsoft towards a multiyear services relationship, rather than a “we’re ready to true up” software buying episode.
• Subscription pricing continues to build tighter links with the venerable Enterprise Agreement. One of the biggest challenges I see with clients that want to consume these services from Microsoft is the linkage (or lack thereof) between their existing Enterprise Agreement (EA) with Microsoft’s cloud services. Frankly, it’s a confusing mess. However, that is changing. There’s a lot of activity here, all of which should be available by the end of Q3, including streamlining the process to add 365 plans to existing EAs, making the transition between 365 plans easier, and the ability to tie Office 365 into premier support agreements for both customers and partners.
• Microsoft’s messaging to partners is heavily focused on subscription SKUs, licensing and roadmaps. My informal assessment of interest at WPC, measured by attendance, questions and general feedback is that the sessions that covered Office 365 licensing, SKUs and partner selling opportunities were at least equal to other sessions I attended. (Remember, these are partners, not customers, and are therefore focused on top-line growth and margins, so they will attend sessions that help them meet said goals.) Looking at various roadmap slides from Microsoft product folks was like sitting in on client pitch by Workday, Salesforce or NetSuite — a heavy focus on product releases plotted along a timeline showing how many new features have been released during a very short period of time. Not something typically seen from Microsoft.

Recognizing that these three examples are somewhat narrow and are focused on a specific set of products that are important to the enterprise, here’s Microsoft’s recently announced reorganization, which addresses their transformation to a devices and services company across both consumer and business segments.

Whether you’re a partner or a customer, it’s likely you have a considerable amount of time, energy and money invested in Microsoft. Microsoft, like many other technology companies, is transforming into a services-first company.

About the author

Stanton helps enterprise IT and sourcing leaders rationalize and capitalize on emerging technology opportunities in the context of the global sourcing industry. He brings extensive knowledge of today’s cloud and automation ecosystems, as well as other disruptive trends that are helping to shape and disrupt the business computing landscape. Stanton has been with ISG for more over a decade. During his tenure he has helped clients develop, negotiate and implement cloud infrastructure sourcing strategies, evaluate and select software-as-a-service platforms, identify and implement best-in-class service brokerage models, and assess how the emerging cloud master architecture can be leveraged for competitive advantage. Stanton has also guided a number of leading service providers in the development of next-generation cloud strategies. Stanton is a recognized industry expert, and has been quoted in CIO, Forbes and The Times of London. You can follow Stanton on Twitter: @stantonmjones.