The Cloud, Microsoft, and Channel Eclipse

By Paula Bernier

Microsoft kicked off 2014 with the news that it would make deep cuts in the commissions of service providers selling its Office 365, Exchange Online, and the company’s other cloud services. The cuts, which were instituted to the Online Services Advisor Incentive program in late January, ranged from 15 to 50 percent, according to reports. Also in January, Microsoft joined forces with web hosting giant GoDaddy, which as a result is selling Office 365 to the small business community – yet another move many service providers selling these products view as an assault on their livelihoods.

Speaking at last month’s ITEXPO in Miami, independenceIT’s Jim Lippie referred to what’s happening with Microsoft and MSPs as just one example of what he calls channel eclipse. About 15 percent of MSPs are in hyper-growth, he said, but there are also a number of MSPs that aren’t doing very well because companies like Microsoft that used to be channel companies now can go direct to the customer and because network elements like Exchange servers have moved into the cloud.

“I don’t know anyone who has an on-prem Exchange server,” he commented, suggesting that MSPs need to embrace the cloud and position themselves as trusted advisors.

While Lippie talks about channel eclipse, Peter Radizeski, founder and president of consulting company RAD-INFO Inc., sees things in a slightly different light.

“Microsoft is not eclipsing their channel, they are smothering it,” he said. “[Managed service providers] typically made money on running Exchange and Small Business Server for SMB. SBS has been end of life. Office 365 has taken much of the Hosted Exchange business – or they have lost it to companies like or other

service providers giving it away for $1 to $8 per inbox.”

But MSPs didn’t want to sell Office 365 anyway, according to Radizeski, who says these companies prefer “playing with boxes.”

“In Tampa Bay, some have become software programmers instead of dealing with Microsoft's channel interruption,” he added.

Radizeski also offered these words of warning: “Channel partners have to be cognizant of the changes coming – and have multiple lines of revenue. It's the only way to safeguard against one vendor from wiping out your business.”

As noted above, one of those changes is the arrival of the cloud.

In its Annual Trends in Cloud Computing Report, published in August 2013, IT industry association CompTIA reported that approximately half of channel firms see faster revenue growth and larger profits from cloud offerings than from traditional offerings, but mentions that there is still confusion related to cloud computing and that just less than half (46 percent) of channel firms have established the cloud as a strategic part of their business plans. That may be in large part due to the challenges of building the right skill sets to move on the cloud opportunity, the report indicated.

“As more disruptive technologies hit the market, many IT service providers are working overtime to protect their margins,” according to a March 6 CompTIA blog. “While cloud and managed services bring new recurring revenue opportunities, they’re also lowering the demand for formerly lucrative activities, such as server and software installation. On one hand, the increase in monthly income can work wonders for your business’ value, but it may take months – or even years – to restore cash flow after converting from a traditional reseller model. The higher an organization’s project revenue, the harder that transition may be.”

There are four basic business models the channel can embrace when it comes to the cloud, according to the above-reference CompTIA report. That includes Build, Provide/Provision, Enable/Integrate and Manage/Support. The association says seven in 10 solution providers involved in the cloud start with the Build part and expand from there, and 26 percent play in all four of these categories.

“Business model decisions pose a tricky task for channel firms making – or having made – a cloud transition,” according to the report. “Primary considerations depend on where a company wants to go with cloud: Resell a vendor’s cloud solutions? Aggregate and broker cloud services from a variety of different sources? Integrate and customize cloud-based apps and services, or simply sell the infrastructure to an end user and provide consulting? Each of these paths and more are possibilities, as are varying revenue models available for all.”

Deciding on a cloud business model was a 2013 challenge for 45 percent of those channel companies surveyed. But the No. 1 challenge for the channel relative to the cloud, according to the report, is developing the appropriate sales and technical expertise.

Edited by Cassandra Tucker

Executive Editor, TMC

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