Microsoft’s New World Order – It is Not Just About SaaS

As we enter into 2015, Microsoft is on the verge of recapturing some of the cool factor that they lost nearly a decade ago to the likes of Apple and Google.  No longer is the Redmond company looked at as the “Necessary Evil” or “800 Pound Gorilla” but rather a new view of the company has slowly but steadily taking hold.  That is a company that provides services, software and solutions that you don’t necessarily have to add the additional costs of hardware to run.  Microsoft is full-on running to the Cloud and we as consumers will see the benefits but so will the Enterprise.  This run to the Cloud also has forced Microsoft to in many ways completely rethink their income streams.  No longer, especially in the consumer space, is the company able by-and-large to charge a flat fee for software.  Consumers have become conditioned to the App World and subscriptions and actually Microsoft probably has Apple to thank for that.

But how do you shift a company that has long been charging for software as a one-time license fee to a Software as a Service (SaaS) or Monthly Recurring Revenue (MRR) model without going bankrupt doing it and not alienating your customer base, particularly in the Enterprise?  Carefully.  Very carefully.  The challenge for Microsoft isn’t so much the consumer end of the equation.  It is the Enterprise.  Corporations large and small have for decades purchased software, installed in on hardware and paid maintenance on that software to keep it up-to-date and to get access to the latest version.  Complicating this matter has been Microsoft’s eye watering number of SKUs for what seemingly is the same product.  Even the most savvy Enterprise has been caught out by getting incorrect versions of product or, worse, been out of license compliance unbeknownst to them. While a lot of what Microsoft has been driving to the Cloud has been consumer focused, there is also a lot moving there for Enterprises which should also benefit them in the long run.

Now make no mistake: Microsoft will continue to sell software licenses in the traditional way to Enterprises.  Windows, for example, likely will always have a license cost model available.  But other things that we traditionally think about as premise only solutions are moving to the Cloud: Exchange, Active Directory, SQL, Dynamics and other solutions.  All of these are driven from the monolithic Azure solution that can be many things to many organizations.  This is where SaaS and MRR for Microsoft becomes critical.  Microsoft, for a fraction of the cost of buying a software license and installing on a server in the traditional sense, can go to the Enterprise and offer a bundle of solutions and services based in the Cloud.  Enterprises big and small then simply see a one-line Operations Cost every month in their P&L instead of spikes of IT spending when new license agreements come into play or renewals happen.  It makes the conversations between a CFO and a CIO much easier and in some locales, these monthly costs come with tax benefits for the Enterprise.

There are other benefits of course to a MRR model to the Enterprise.  First, it allows for the CIO or IT team to focus their budgetary dollars to bigger, more projects that will benefit the agility and competitive element of the company.  Secondly, it assures an organization that they will have access to the most current line of products from Microsoft.  Ironically, these exact same benefits also help Microsoft.

From a pure sales perspective, if you as an Enterprise have more money to spend each month, that means vendors know there is more budget to spend – with them.  Microsoft is no different than any other company.  They are in business to make money and even if they add $1 per month per user it will add up to literally billions for the company due to their shear size of their customer base.  Some will frown on this notion but let’s be honest:  If Microsoft were to go away tomorrow the world would be an a world of hurt very, very fast.  Microsoft is quite literally everywhere from your desktop PC to your car or to the elevator you took up to your office floor this morning.  They have to make money and there is no need to defend this point any further.

The other benefit for Microsoft is keeping their Enterprise customers on current releases of their solutions.  Microsoft has been plagued with having to support a huge number of versions of software solutions over their history.  Folks, there are still enterprises that are running Windows XP.  It is a burden for that Enterprise and in some cases it has been a necessary evil because of the way that Microsoft products have been developed in the past.  There are plenty of horror stories out there of a bespoke application for an enterprise not working after an upgrade to their Microsoft platforms so, to avoid this, companies have simply stayed on old code.  Smaller companies in some cases simply don’t have the budget to go re-code an application to get it to work with Internet Explorer 10 or Windows 8.1.  That brings in risks around security and stability that more contemporary software avoids.  Microsoft has in part dealt with this by leveling the API playing field both internally and externally.  Going back to the SaaS/MRR discussion for a moment, having software as a line item in the P&L also frees up budget for organizations to do that re-code work.  They can fund it simply by shifting budget dollars from software license fees to internal development.

For Microsoft, Software as a Service (SaaS) therefore helps cut down the time that particular software versions have to be supported.  They can get their Enterprise customers to upgrade to the latest versions, often which are pushed to them via a Cloud service.  Yes there are still application considerations for the Enterprise as well as general workflow processes to consider but, ultimately, the upgrade cycle should shrink in this model which is mutually beneficial to the customer and to Microsoft.

This brings me back to my first question in this post which is how does Microsoft roll out an Enterprise class cloud and various software solutions in it without going bankrupt.  The challenge is very real.  Microsoft is spending billions on Azure and other services and in some areas completely revamping their licensing model.  Take Office 365 as a great example.  You can buy the Office 2013 suite out right for about $400 or you can subscribe to Office 365 and get both the web and desktop versions of the software for $99 a year.  That’s the consumer pricing – Enterprises pay far less for these as they buy them in large numbers.  What it does however is open up new revenue streams that in the software license model simply don’t exist.  Take Office on iOS devices.  Just two years ago the idea of having Office on your iPad for free was unthinkable and Microsoft was having an almighty time trying to get into the iOS world as a mainstay player.  That’s clearly no longer the case.

For Microsoft the question is funding the transition in the short term over the next 3-5 years.  They have the capital to do it and do it big which is a luxury that very few organizations can afford to do.  IBM, Apple and Google all come to mind as potential players who could (or are in the process of doing) what Microsoft is doing in their move to SaaS and MRR but they don’t have the one thing that Microsoft does in the Enterprise with the possible exception of IBM: The customer install base.

The company also has to tread carefully when it comes to introducing this SaaS model into the Enterprise so as not to offend that customer base.  The argument from customers goes something along the lines of “Why would I want to pay monthly for something when I can just buy it one time?”  The answer is back to budgets, IT spend and internal projects to make the company competitive.  It is a delicate conversation to be sure but one that must take place if organizations are going to continue to grow and be competitive in their respective marketplaces.  Further, as IT staff and CIOs become younger and more open to this consumerization of software, the conversation will get easier over time.  But the key for Microsoft – and anyone going in to the SaaS/MRR market in general – is the next 3-5 years as this transition happens.

SaaS and MRR will benefit Microsoft but it is not a one sided equation.  It will benefit the Enterprise just as it has the consumer.  It will free up big, one time purchases which in turn frees up budgets for other projects.  It assures both Microsoft and the Enterprise customer that the latest, most secure and stable software releases are being run and it cuts down on support costs for both.  It is a win-win and if there is one company that can pull this off in the Enterprise space, it is Microsoft.  They are already there and they have the funds to do it right.