At this week's Microsoft Worldwide Partner Conference, many attendees will searching for reassurance from Redmond now that Microsoft is finally revving up its hosted software business -- and threatening to steal away their partners' established efforts as a result.

At its Tech Ed conference last month, Microsoft announced that four companies are now using Microsoft software that is delivered through the Web from Microsoft's datacentres. For those customers, Microsoft is offering back-end applications such as Exchange Server, SharePoint, Live Communications Server and Systems Management Server.

But Microsoft also confirmed for the first time that the company is investigating how to deliver hosted versions of every one of its server side software.

Confirmed to be available soon include the SQL Server database, Microsoft Office PerformancePoint Server, Forefront security and BizTalk network directory applications, as well an Asset Inventory Service for managing desktop PCs. The effort is being led by former Microsoft CIO and current vice-president, Ron Markezich.

Microsoft declined to comment before its Partner Conference, which is being held in Denver between Tuesday and Thursday.

Pushing onto the partners' turf

Ironically, Microsoft is pushing hardest into the SaaS space -- the area where its partners have had the most success. In the consumer arena, Microsoft does not have to worry about hurting partners as it rolls out its Windows Live services.

Similarly, Microsoft has never allowed partners to resell Office online. And despite threats from Office 2.0 providers such as ThinkFree and Google Docs, Microsoft continues to insist it has no plans to offer a hosted version of Office or let its partners do so.

By contrast, Microsoft began letting service providers sell hosted Exchange email services five years ago, according to an analyst with Black Diamond, Michael Osterman.

Today, about 20 million Exchange email accounts worldwide -- about one-fifth of all Exchange users -- are handled by service providers, according to research firm, The Radicati Group. That is predicted to grow to 70 million, or 23 per cent of total Exchange accounts, by 2011, according to Radicati, which did not predict how many of those would be managed by Microsoft itself.

Microsoft's collaboration software, SharePoint, has also gained a following among hosted providers.

Tsunami or rising tide?

Longtime Microsoft partners such as CEO of Exchange and SharePoint service provider GroupSPARK, Ravi Agarwal, said they are watching Microsoft's moves very carefully these days.

"It's definitely a large threat," Agarwal said. "We will be making some turns, doing the things we need to do to distinguish ourselves in the market."

At the same time, Agarwal said Microsoft's entry into the market could benefit his firm, too.

"Most SMBs have no idea that you can get hosted Exchange," he said. "From that perspective, and the fact that Microsoft has a slightly larger marketing budget than we do, it could become a situation of a rising tide lifting all boats."

And there are challenges aplenty for Redmond, Agarwal said. For one, Agarwal expects that Microsoft to charge much higher prices than his firm.

"It is going to have to be a profitable venture for them. And I like to think that with just 29 employees, we are a leaner, meaner organisation than they can be," he said.

Agarwal also said Microsoft's poor reputation for technical support -- some of it earned, some of it merely a halo effect from disgruntled consumers -- will prove to be a major impediment.

Will Microsoft get in its own way?

For CTO of Exchange email service provider Azaleos, Keith McCall, Microsoft's main self-imposed obstacle will be its unwillingness to host and sell software other than its own. For instance, Azaleos offers BlackBerry Enterprise Server for 'pushing' out email to smartphone-toting executives in conjunction with Exchange.

"I don't see Microsoft hosting BlackBerry Enterprise Server, do you?" McCall said.

Microsoft has yet to reveal any plans to make its hosted software more interoperable with non-Microsoft applications, according to McCall.

"Microsoft is struggling with the idea that world contains more than just Microsoft software," he said. "It's the same situation that IBM faced 20 years ago when it believed the whole world had to be blue."

A former Microsoft employee, McCall points out that despite launching its managed services division several years ago, Microsoft only has four customers to show for it.

Microsoft's announcements also aren't stopping new firms in the US, like LoadSpring Solutions and Rackspace, from recently announcing their own hosted Exchange services.

"I think that Microsoft's offering will appeal only to a very small subset of the market," McCall said. "Honestly, I'm not that concerned."