Microsoft's Online Push Tests Hosting Partners

Will Microsoft's push into online services torpedo its partners in the web hosting industry? Or will it simply siphon off low-end hosting and e-mail services that are already being commoditized?

Microsoft's hosting partners have been pondering this question since the 2006 rollout of Office Live Small Business, Microsoft's free hosting offering. On June 28 Microsoft announced that more than 1 million small businesses are now hosting their web sites on Office Live Small Business.

This week's rollout of Microsoft Online Services (MOS) provided details on Microsoft's approach to hosted Exchange and SharePoint, which will be offered for $3 per user per month. Partners have the option of focusing on value-added services or referring customers to Microsoft in return for an affiliate-style commission.

Microsoft CEO Steve Ballmer, speaking Wednesday at the Microsoft Worldwide Partner Conference in Houston, sought to address concerns that Microsoft is now competing with its partners. "There will be customers who want to work on our scale platform in the cloud," said Ballmer. "There are going to be customers, though, who want hosted, dedicated solutions from you. We will support both."

"I think if you go out 10 years from now ... I think it's probably fair to say that cloud services will grow faster than the hosting opportunity, but that doesn't mean hosting isn't going to grow. And certainly if we don't do cloud services, our key competitors will do them, and we can't give them the edge and innovation that provides. So we're supporting both models," Ballmer added.

On Tuesday Stephen Elop, president of Microsoft Business Division, acknowledged that the new online services have created "tension" with partners. "This really is a transformation," Elop said. "This is hard. Every one of us has to embrace the fact that a lot has changed and will continue to change. As a partner of Microsoft, your business must change as well. We need you to be successful with online services in order for us to be successful."

The high-volume, low-margin nature of web hosting has made the industry an area of strength for open source technologies like Linux, Apache and MySQL. In recent years, Microsoft has worked hard to improve its position with web hosts, and has made some progress. Between March 2006 and August 2007, Microsoft made steady inroads into Apache's market share lead in Netcraft's Web Server Survey. That progress has stalled over the past nine months, suggesting that hosting firms were either waiting for Server 2008 or clarity on Microsoft's cloud strategy.

The new MOS approach offers opportunities for Microsoft partners providing custom solutions and on-premises support. If it shifts Exchange services to the cloud, that's a trend that has been felt by hosts on open source platforms as well. DreamHost, one of the largest shared hosting specialists in the United States, is encouraging its customers to use Google's Gmail for their e-mail.

The emergence of cloud computing has forced the hosting industry to consider how to best respond. Now that Microsoft has detailed its cloud pricing and partner plans, hosting providers can do the financial math and decide how to work with Microsoft - or not - in charting a way forward.