Microsoft and the Application Hosting Trend

Feature
Microsoft & the Internet Application Hosting Trend
Redmond isn't charging the field, but neither is it
ignoring what may be the future of business software

By Dwight Davis, Summit Strategies

[print version of this page]

Much as it was in 1995, when computing shifted permanently toward the Internet, Microsoft is a bit behind the curve when it comes to Internet applications hosting. Other infrastructure software vendors, including Lotus and Netscape Communications, have moved more quickly to promote the Internet applications hosting and business solutions model, and to adapt their products and licensing models to support it.
That said, it's also important to emphasize that the Internet applications hosting train has yet to leave the station. Though every week seems to bring another group of ISVs [Independent Software Vendors], IBSPs [Internet Business Service Providers] and other players praising Internet-based applications hosting, this particular phenomenon is still very much an unknown quantity.

And Microsoft isn't the only party that is approaching Internet applications hosting with some ambivalence. If the trend takes hold, it could prove extremely disruptive to the sales and distribution model on which the entire software industry is based. No wonder that Microsoft -- the biggest beneficiary under the current model --views Internet applications hosting with some trepidation.

The drive towards services

Microsoft has closely followed the trend of ISPs and other network providers to add ever-more-advanced services. These providers generally started by offering simple Internet access and then moved to hosting clients' Web sites.

Now, close to 80 percent of the ISP community offers Web content hosting, according to Microsoft's estimates. And those hosted sites continue to grow increasingly sophisticated. Once-static pages have evolved into dynamic pages that are constantly updated via links to databases and other back-end systems.

As their services offerings progressed, Microsoft happily supplied the demands of such ISPs with NT Server and its integral Web server, Internet Information Server (IIS). It also crafted technologies such as Active Server Pages to better distribute the processing load between servers and clients; built links between IIS and the SQL Server database and Exchange Server messaging engine; and provided development tools, such as FrontPage and Visual InterDev, to build and maintain Web sites.

Then, many ISPs began moving beyond access and content hosting to provide the next level of service: e-commerce. Microsoft responded by incorporating encryption, digital certificates and other security standards into its products. It also introduced the Microsoft Commercial Internet System (MCIS), a catchall product with which ISPs can implement e-commerce and other hosting services, such as mail and chat.

E-commerce has allowed providers to collect higher margins than their access and content-hosting counterparts. But even e-commerce hosting is now showing signs of becoming something of a commodity business. [Related article: Cacheworthy, 29.Oct.98]

Rent-an-App

The prospect of commodification is driving many Internet-based services providers to contemplate one form or another of Internet applications hosting. Such hosting promises the steady annuity stream of a rental model, and also opens the door for IBSPs to participate in high-margin integration, services and consulting businesses.

It is at this juncture -- the step beyond e-commerce hosting -- that Microsoft has some doubts about how the Internet applications hosting market will evolve.

Nevertheless, we do expect Microsoft to gradually adapt its products and its business models to accommodate, and possibly drive, the Internet applications hosting market. The company will get significantly more bullish if it can convince itself that more money will be made than lost via hosted business applications. For now, however, Microsoft is far from sure that it can come out ahead if Internet applications hosting really takes off.

One thing Microsoft asserts it won't do is outsource its own applications. Oracle and a few other ISVs have indicated they'll do just that, but Microsoft has no desire to compete with its channel partners, be they traditional resellers or new-age IBSPs.

The evidence suggests we can take Microsoft at its word in this regard. The company has studiously avoided selling its products direct via its own Web site out of deference to its channel partners. We have no reason to think Microsoft will approach the opportunity to rent its software directly any differently.

At the same time, Microsoft acknowledges a small but growing demand for certain types of outsourced collaboration services. Competitor Lotus Development pioneered this space with offerings such as Instant!TEAMROOM, a Notes Domino-based application that IBSPs can use to support secure online collaborations among groups of coworkers.

MCIS 2.0 supports a similar ability to host such private "communities of interest." Microsoft also expects the business of supporting supply-chain services that link the operations of business partners to grow rapidly. Microsoft is broadly promoting such services via the "Value-Chain Initiative" its Application Developers Customer Unit (ADCU, pronounced "ad-coo") is evangelizing. [ADCU is the focus of another Summit report, "Microsoft's ADCU: Winning the Enterprise, One Industry at a Time." Contact Summit Strategies for details. -Ed.]

The marketplace rules

Ultimately, even if it wants to, Microsoft won't be able to block the Internet applications hosting trend - any more than it was able to block the rise of the Internet itself. But it is in a good position to influence both the pace and the profile of Internet applications hosting.

The IBSP community, like most other industry sectors, is becoming increasingly interested in using NT Server and its associated applications. If Microsoft drags its feet in making its products and policies "Internet-applications-hosting friendly," it could put a brake on the evolution of this market. Conversely, if Microsoft wholeheartedly lends its imprimatur to Internet-based applications hosting, it could spark a rapid expansion. Meanwhile, many vendors will look to Microsoft to set the standard for licensing software in outsourced deployments.

Despite Microsoft's pivotal role, however, it will be business users who ultimately determine the success of the Internet applications and business solutions hosting model. And, as a group, users are even more cautious than Microsoft. Large corporations that have used EDS, IBM Global Services and other traditional outsourcers for years will look askance at the new breed of IBSPs trying to win their business (although the traditional outsourcers will also host applications over the Internet).

Small-to-midsize companies, meanwhile, must be educated from scratch about the benefits that Internet applications hosting may provide. And application users will take some time to sort through the matrix of security, performance, reliability and cost issues Internet applications hosting raises. That lengthy process should give Microsoft plenty of time to flesh out its still-embryonic strategy for dealing with this tantalizing, but unproven, market phenomenon.

This article is excerpted with permission from Summit Strategies' Executive Report, "Microsoft Warily Evaluates the Internet Hosting Phenomenon," by Dwight Davis. Summit Strategies has created a series of reports on Internet Applications and Business Solutions Hosting that covers some of the issues raised in this excerpt in far greater detail.

© 1998 Summit Strategies, Inc.