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May 20, 2008

Microsoft anticipates a tidal wave of Exchange outsourcing

Posted by David Hunter at 2:19 PM ET.

Reuters’ Daisuke Wakabayashi snagged an interview with Chris Capossela (the Microsoft SVP in charge of Office) who delivers some startling prognostications about the future of Microsoft’s Exchange mail server:

"In five years, 50 percent of our Exchange mailboxes will be Exchange Online," said Capossela, who expects a portion of Exchange Online customers to come from customers switching from International Business Machines’ Lotus Domino system.

In case you aren’t familiar with it, Exchange Online is Microsoft’s not yet generally available offering of hosted Exchange to customers who would prefer to outsource the provisioning, maintenance, and operation of their Exchange servers. As I observed when the Microsoft Online Services nomenclature was announced, "this is just good old fashioned managed hosting," and Microsoft partners have been offering the equivalent of Exchange Online for years and are continuing to offer it despite Microsoft clearly having set their sights on the market. There’s probably room for some partners to survive alongside Microsoft, but not very much.

However, Microsoft’s venture into managed hosting carries with it the financial burden of all the players in the outsourcing game: high costs yielding stable high revenues but with low margins.

In a services business, the customer will pay Microsoft a larger fee, since Microsoft also runs and maintains all the hardware. But Microsoft’s profit margins may not be "as high," Capossela said, even though revenue may be more consistent.

The key for Microsoft will be to run its computers systems as efficiently as possible to reduce hardware costs.

"That’s where we make the business model work," said Capossela, 38, who worked in his earlier years at the company as a speech writing assistant for co-founder Bill Gates.

Spoken like a good outsourcer, but the question remains why Microsoft felt the need to get into this low margin business and squeeze out their partners who were already providing an equivalent service. The answer has to be fear of the Web app vendors like Google with whom they are already in competition and Microsoft’s inclination to do things themselves that they consider important instead of leaving them to partners. The canonical example of this is the tossing of the PlaysForSure partners under the Zune train.

Finally, Capossela refers to Exchange Online as "cloud computing" which was duly echoed by the punditry. While I concede that definitions of cloud computing are befittingly nebulous, most require that the computing resource be dynamically adaptive to changing demands and it is hard to see how outsourcing your Exchange Server to Microsoft really qualifies. On the other hand, if your prefer a big tent definition, then the Microsoft partners who will see their Exchange hosting revenues stagnate or dry up in the face of Exchange Online can extract cold comfort from the thought that they beat Microsoft by years in putting Exchange in the cloud.

Filed under Chris Capossela, Coopetition, Exchange, Executives, Google, Hosted Services, Microsoft, Microsoft Online Services, Partner Program, Servers

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2 Responses to “Microsoft anticipates a tidal wave of Exchange outsourcing”

  1. Microsoft unveils new Microsoft Online Services offerings | Microsoft News Tracker Says:

    [...] hosting services before Microsoft Online Services was even a gleam in Microsoft’s eye (e.g. hosted Exchange). An obvious salve for the wound is to cut partners in on the deals and in that regard Microsoft [...]

  2. Howard Says:

    I need my Hosted Exchange to interface with my Blackberry – something that Microsoft does not supply but my supplier does ( for reference. Many for that reason will not move over to Google or MS

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