Research Report: Microsoft Partners – Before Adopting Azure, Understand the 12 Benefits And Risks

Published on July 11, 2010 by R "Ray" Wang

It’s All About The Cloud At WPC10

Attendees at this year’s Microsoft Worldwide Partner Conference 2010 in Washington, D.C. already expect Windows Azure development to be a key theme throughout this annual pilgrimage.  Microsoft has made significant investments into the cloud.   Many executives from the Redmond, WA, software giant have publicly stated that 90% of its development will be focused on the Cloud by 2012.  Delivery of the Cloud begins with the Azure platform which includes three main offerings:

  1. Microsoft Windows Azure
  2. Microsoft SQL Azure (formerly SQL Services)
  3. Microsoft Windows Azure Platform: AppFabric (formerly .NET Services).

Therefore, Microsoft partners must determine their strategy based on what part of the cloud they plan to compete in and which Azure services to leverage.  As with any cloud platform, the four layers include infrastructure, orchestration, creation, and consumption (see Figure 1):

  • Infrastructure. At a minimum, Windows Azure provides the infrastructure as a service.  Data center investments and the related capital expense (capex) is replace with oeprational expenses (opex).  Most partners will take advantage of Azure at the infrastructure level or consider alternatives such as Amazon EC2 or even self provision hosting on partner servers and hardware.
  • Orchestration. Microsoft Windows Azure Platform: AppFabric delivers the key “middleware” layers.  AppFabric includes an enterprise service bus to connect across network and organizational boundaries.  AppFabric also delivers access control security for federated authorization.  Most partners will leverage these PaaS tools.  However, non-Microsoft tools could include advanced SaaS integration, complex event processing, business process management, and richer BI tools.  The Windows AppFabric July release now supports Adobe Flash and Microsoft SilverLight.
  • Creation. Most partners will build solutions via VisualStudio and Microsoft SQL Azure (formerly SQL Services).  Other creation tools could include Windows Phone7 and even Java.  Most partners expect to use the majority of tools from Microsoft and augment with third party solutions as needed.
  • Consumption. Here’s where partners will create value added solutions for sale to customers.  Partners must build applications that create market driven differentiators.  For most partners, the value added solutions in the consumption layer will provide the highest margin and return on investment (ROI).

.NET:.NET (tongue and cheek here) – Microsoft partners and developers can transfer existing skill sets and move to the cloud with ease, once Microsoft irons out the business model for partners on Azure.

Figure 1. Partners Must Determine Which Layer To Place Strategic Bets


Azure And Cloud Deployment Brings Many Benefits…

As cloud adoption gains favor with many clients and industries, Microsoft Partners must consider when to begin investment in Azure.  In conversations with over 71 partners, identified benefits can be grouped into six areas that include:

  1. Faster deployment times and client adoption. Seven Cloud/SaaS benefits include richer user experience, rapid implementation, frequent cycles of innovation, minimal upgrade hassles, always on deployment, subscription pricing, and scalability.  These benefits lead to faster client adoption and greater usage in an organization.  Partners can reduce travel expenses per client.  Clients can increase time to go-live.
  2. Greater pool of development resources. Partners can expect to find a rich source of development talent.  Existing Microsoft developers on VisualStudio and other Microsoft tools can participate in Azure development projects with ease.  Partners will increase globally sourced expertise.  Development resources will specialize over time and create centers of excellence.
  3. Recurring revenue streams. A key component of SaaS/Cloud is utility pricing.  Partners that build IP and solutions will move to a more stable subscription revenue model.  Most billing will move from upfront to monthly or quarterly.
  4. Improved TCO and margin for differentiated IP. The cost of development and time to market will decrease.  The result – improved margins and better ROI for new product development.  Partners can test scenarios with the Microsoft Azure ROI calculator.
  5. Opportunity to break out of the Microsoft client base. Partners who build SaaS/Cloud solutions can market to any customer in the world.  Customers don’t care what database, application development platform, or technology stack partners use in the cloud.  Clients only care about service level agreements and contractual obligations.
  6. Lower application lifecycle costs. Partners benefit directly from a one-to-many delivery.  A code change, regulatory update, or bug fix delivered once will apply to all customers in a multi-tenant model.  For those going with single instance hosting, at least application management costs will be reduced.

…Yet Cloud Models Create New Channel Partner Risks

However, with the benefits come some potential channel risks to partners.  While none of these risks are insurmountable, partners must take caution and note as they plan out their go-forward partnership strategy.  The six risks identified by 71 partners in moving to Azure include:

  1. Potential loss of account control to Microsoft. Partners who host with Microsoft remove a key barrier in the partner relationship – account control.  Customers for the first time will directly work with Microsoft via hosting through Azure.  Partners should lobby hard for policies that keep the balance within the hands of the partners or risk losing long term account control.
  2. Increased competition for development resources. With global access, partners face the double edged sword in securing resources.  A number of marginal players will emerge but competition for A-players will be fierce as partners ramp up.
  3. Shift to volume business. Partners must think about how to build offerings for volume deployments.  Faster deployments will result in the need to increase the volume to make up for lower revenues.  Scaling repeatable offerings will improve profit margins.
  4. Decline in upfront profit and revenue collection. Partners used to half of the payments upfront and the rest upon delivery will have to adjust to cash flow changes with subscription billing.  Cash flow issues will increase and cap ex for reinvestment and development will decline.
  5. Accelerated globalization and market competition. With SaaS/Cloud, every partner, ISV, and SI solution offering is competing for mind share.  Competition for solutions goes global, cross-platform, and cross industry.  Partners must prepare to compete for mind share among all the technology vendors offering solutions.
  6. Increased self-hosting and integration costs. Partners that self-host will face long term cost challenges.  As Microsoft, Amazon, and Google build out large scale data centers, their cost of delivery will reach 1/10th of a partner’s ability to host by 2015.  Moreover, data, process, and metadata integration among various cloud platforms remains the most complex challenge.  Partners who can not scale in integration and data center costs will find themselves burdened with a new legacy cost structure.

Figure 2. The Advantages And Disadvantages Of Azure For Partners

The Bottom Line For Microsoft Partners – Success Requires A Focus On Differentiated IP Creation

As market momentum increases for Cloud solutions, partners must make the transition to new business models.  The commoditization of key components in the solution ecosystem accelerates with commoditized solutions across both the tools f0r creation and the tools for distribution (see Figure 3.)  Consequently, new profit pools will emerge as partners invest in verticalized solutions, geographic expertise, and role tailored experiences.  The result – partners must focus on building differentiated IP or face rapid margin deterioration.  With new solutions in tow, the Cloud will allow partners to go on a SaaS offensive and grow into markets that previously were walled off because of cultural, architectural, technical, and geographical barriers.

Figure 3.  Cloud Models Force Partners Into Value Added Solutions In The Race For the Largest Chunk Of The Technology Budget

Your POV

Microsoft Partners, what’s your view on SaaS vs Cloud and Azure?  Ready to embrace Azure as a key investment and opportunity?  Are you looking at private, public, or hybrid cloud options?  Add your comments to the discussion or send on to rwang0 at gmail dot com or r at softwaresinsider dot org and we’ll keep your anonymity.

Please let us know if you need help you and your clients with SaaS/Cloud strategies.  Here’s how we can help:

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  • Demystifying software licensing

Resources And Related Research:


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  • As cloud adoption gains favor with many clients and industries, Microsoft Partners must consider when to begin investment in Azure.

  • Si – Microsoft remains a fast follower but when they are committed they are “all in”. Though they don’t like to talk about how they provide a full stack of IaaS, PaaS, DaaS, and SaaS, they are the only vendor to deliver the full cloud offering. Azure has a lot of potential. Let’s see how it materializes. – Ray

  • Microsoft might not be the first, but when they show up the offering is very compelling. You and Doug are both right: this will globalize the ISV market, but that’s as expected with the web — if it’s globalizing every other industry surely it would do it with software.

  • Here’s the following response from the Microsoft AR team:

    1) The blog makes the assumption that Microsoft’s cloud offerings only run in its datacenters. MS provides a services platform and a server platform, and both can be used to offer cloud services. There is a revenue opportunity for private cloud, IaaS and SaaS with both of these platforms. We have a very healthy hosting partner network, i.e. Amazon, that is hosting enterprise workloads and applications on via Windows Server, as well a strong ISV and developer ecosystem that is developing applications for Windows Azure network. With the Windows Azure platform appliance, that network (and opportunity) just grew tremendously.

    2) Regarding Azure, the blog emphasizes that only Microsoft is offering Azure. With the appliance announcement, there will be more opportunities for Microsoft partners to offer cloud services based on Azure, such as Dell, HP and Fujitsu.

    3) As Windows Azure services will be offered by more vendors, the risk of MS lock in or MS controlling the account is decreased.

    Microsoft AR Team

  • Doug – thanks for the great comments. Azure means every partner with a solution truly competes in the global market. This means every partner will have to develop their portfolio of solutions that can scale to meet their client needs. B/c of the more rapid time to market and commoditization of IP, scaling and volume business become strategic requirements. Most partners will rush to the same high margin low hanging fruit. This could lead to greater competition. Those who can reach the market the fastest and scale will have an advantage. – Ray

  • Ray,

    I’m not a Microsoft partner and we have a Java strategy. I read the posting more for background information, but one thing struck me as odd. Your Weakness Item 5 on globalization. I think that you should consider this to be a strength of the Cloud business model. And, I think that there is a different way to look at Weakness Item 3 on volume. I find myself oddly supporting Microsoft.

    Globalization is Here Already

    Many smaller ISVs who are Microsoft partners have focused on regional markets. The pre-Cloud business model made scaling local companies to become global players very difficult. Selling was face-to-face. Communications and travel for sales, implementation and support was expensive. (VoIP has made a big dent in some of these costs.)

    Smaller ISVs are being affected by globalization where competitors come from a different State, Country and Continent. The distribution channel is becoming more efficient. So, the small ISVs must sell globally because the world is coming to their markets. Azure or any development/deployment platform that enables ISVs to sell globally is a good thing. Of course, there will be a “survival of the fittest”, and many ISVs will fare poorly.

    Differentiate with Value
    Weakness number 3 suggest that ISVs will need to move to a volume business. But is this true? My sense is that Cloud computing, the commoditization of the stack, open source etc. are trends that are showing that value is in the application that users touch. Much less in the middleware. So, ISVs with strong vertical (or even micro-vertical) expertise may be able to leverage cloud computing for the long tail – perhaps expand in volume somewhat, but really to add more and more value. The old model seemed to favour the vendors who genericized software rather than those who added value, particularly for those organizations involved in very unique areas – these businesses had to customize. I think that Azure may help Microsoft ISVs to establish global beachheads. Many customers have reached the point of diminishing returns with customizing generic ERP applications. This model may be an attractive alternative for them. ISVs may not have to give up much in pricing to achieve high volumes if they can prove value and lower TCO.

    Have fun in DC. It’s been cooling down here to the low 90’s in the past few days 😉


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