First Coffee for November 9, 2005

David Sims : First Coffee
David Sims
| CRM, ERP, Contact Center, Turkish Coffee and Astroichthiology:

First Coffee for November 9, 2005

By David Sims
david@firstcoffee.biz

The news as of the first coffee this morning, and the music is a good ol’ Tom Waits-a-Thon on the CD changer – Mule Variations, Rain Dogs, Swordfishtrombones, Used Songs 1973-1980, oh, a veritable cornucopia. Note to self: Must download Nighthawks At the Diner to replace copy on “permanent loan” to forgotten beneficiary:

After almost missing the Internet train, Bill Gates is determined not to let Microsoft miss what he calls the latest “sea change,” the migration to online services.

As the Associated Press reports, “Bill Gates wrote to top-level executives in a memo aimed at rallying his troops against the new competitive threats the company faces.” That threat would be the technology industry shift’s to Internet-based software and services.

“In an e-mail to top executives, dated Oct. 30 and obtained late Tuesday by The Associated Press, Gates urged company leaders to ‘act quickly and decisively’ to move further into the field of offering such services, in order to best formidable competitors.”

Of course this isn’t the first time Microsoft has acknowledged the importance of delivering technology online, First CoffeeSM’s reminded of Steve Ballmer’s threat that Microsoft was going to give salesforce.com “a run for its money” in the online hosted CRM space.

“This coming ‘services wave’ will be very disruptive,” the AP reports Gates writing. “We have competitors who will seize on these approaches and challenge us – still, the opportunity to lead is very clear.”

While Gates’s memo ten years ago titled “The Internet Tidal Wave,” prompted “a massive shift at Microsoft toward Internet-based technology,” the new memo includes a “memo from Ray Ozzie, one of Microsoft’s three chief technical officers, which outlined ideas for broad companywide changes that can address the growing competitive threat.”

Ozzie’s memo points out the plain fact that Microsoft “faces intense competition from companies like Google Inc.,” the AP says. Ozzie recommends Microsoft “focus on key tenets of the new model, including a shift toward offering free, advertising-supported offerings and more sophisticated, Internet-based methods of delivering products.”

Do they have a chance? More to the point, should they be thinking about competing in this area?

Industry observer Ina Fried thinks Microsoft has to be careful not to mess with what’s profitable for them right now. She quotes Gartner research fellow Tom Bittman, who remarked that for Microsoft the question isn’t so much how can they beat Google, but “it’s more about how you are going to beat the Google model. Microsoft is going to be forced to compete with Google, forced to compete with its own business model.”

Therefore, Bittman and others fear, according to Fried, “that any online offerings from Microsoft could potentially cannibalize sales of the company’s shrink-wrapped software, like Windows and Office, which make up the bulk of the company’s profits.”

Those already in the online software delivery space dismiss Microsoft’s efforts as too little, too late. In an interview early this fall Greg Gianforte, CEO of RightNow Technologies, said Microsoft’s recent emphasis on hosted CRM and the hosted model in general is simply an affirmation of “the fact that the on-demand space is going to dominate the enterprise software market as a whole.”

“It’s probably better to see on-demand as a business model that’s completely replacing an old-fashioned, low-ROI model that is becoming another artifact in the history of information technology,” Gianforte said. “These companies [Microsoft and SAP, which has also announced a big push into hosted services] are simply recognizing that the hosted model we’ve been delivering for almost a decade now is the way to go.”

Their problem, Gianforte says, is that “they can’t possibly beat us at our own game. SAP, for example, would have to completely re-write all of its applications from scratch in order to build a multi-tenancy architecture to match ours. And, from a business perspective, they would have to replace this huge services ecosystem they’ve developed over the years that thrives on complexity and difficulty.

“Microsoft faces similar hurdles. Enterprise applications are something you have to sell direct, which they don’t do. And Microsoft’s customers are in IT – not the business unit, which is where the on-demand buyer is.”

NetSuite’s CEO Zach Nelson is equally publicly unconcerned. “They will be too late to the party when they jump in,” he said earlier this fall about Microsoft’s announced hosted CRM project. “We have a 7 year head start in building the functionality and the systems to deliver software as a service. I don’t care how much money or how many developers they throw at the problem, it will take them 7 years to get to where we are today.”

But, Nelson says, “I hope they do announce on demand products in the CRM and ERP space. It will be the ultimate validation of what we are doing, and will force customer to look at our solutions as well as theirs.”

Salesforce.com’s Marc Benioff was characteristically blunt: “Microsoft has really let this industry and its customers down. Where is the innovation? While we are preparing to release the 19th generation of our on-demand service, they are struggling to release their second. And this is true across many product areas that are popular with businesses and consumers today. Google, RIM, eBay and Apple all thrive today because Microsoft has failed to innovate.”

Yeah, but what do you really think, Marc?

Much of the problem is simply a company built to do one thing has a most difficult time changing direction in mid-stream to being something else. “These big software companies like to take the money and run. They have no idea what it’s like to depend on a subscription model where you must satisfy your customer to get a renewal,” Gianforte says. “We do. The dinosaurs of the software industry can make all the noise they want to. To really come after us, they’d have to completely cannibalize their existing business. They can’t afford to do that, and Wall Street won’t let them.”

Microsoft has the deep pockets to make a serious run at hosted business technology, and are making what appear to be serious forays into the arena. They’ve announced plans for Windows Live and Office Live, two Web-based offerings that aim “to help the company compete with Google, Yahoo Inc., salesforce.com and other companies that are already seeing success with such Web-based offerings,” the AP writes.

The Register is its usual caustic – and insightful – self regarding Microsoft’s Live offerings: “Live software is pure Web 2.0 pop culture. It’s based on a well-established ‘service in the cloud’ architecture that fuses – and confuses – things already in the market, from IM, social networking, downloadable music services and blogs to hosted email, business intelligence and CRM services.”

Basically the fear in Redmond is that as more and more is available via online services, “from word processing to storing photos,” as the AP puts it, “there will be less of a need for Microsoft’s lucrative Windows operating system and Office business software.”

The question, as Bittman says, isn’t if Microsoft needs to do this, but can they transform such a huge corporate culture without sinking during in-the-water repairs? As Fried quotes him, “Can high-volume, high-margin software compete against high-volume, low-margin advertising?” he said. “It’s the clash of two models.”

After all, as industry observer Mary Jo Foley has reported, in early November Brad Wilson, Microsoft’s general manager of CRM, clarified Microsoft’s plans around releasing a hosted version of its CRM 3.0 product: “We are not going to offer a hosted solution ourselves,” Wilson said. “We don’t need to play somebody else’s game.”

Microsoft will provide a hosting infrastructure and “encourage our partners to make the product available on a hosted basis, where appropriate,” Wilson said. What that means, Foley explained, is “Microsoft announced earlier this year that it would make its CRM 3.0 product available via subscription-based pricing under service provider licensing agreements. This means channel partners will be able to offer interested customers a hosted version of CRM 3.0, for which they can pay as they go.”

Confusing? Sure is. Maybe Microsoft not only has to figure out how to retool the ship in the water, but where they really want that ship to go. It doesn’t sound as if they know yet.

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