Microsoft Answers ASP Challenge

The World Wide Web has put Microsoft in reactive mode once again. Instead of fighting a skirmish over browsers, this time the company is battling over its fundamental software licensing model.

Microsoft is positioning Windows 2000 and Windows DNA 2000 as a platform for application service providers. It's adapting its core applications, including Microsoft Exchange and Microsoft Office, for Web use. The company is investing in ASPs, as well as starting up its own hosted service. And in what may be a momentous move, Microsoft is exploring new subscription-based licensing models.

"When you're at the top of the status quo, you're pretty nervous when something changes," said Dwight Davis, an analyst at Boston-based Summit Strategies.

Last November, Microsoft announced the Office Online pilot program, which lets service providers rent out access to Microsoft Office and pay Microsoft by the month. But few providers are promoting the service so far.

Chris Le Tocq, an analyst at GartnerGroup in San Jose, said licensing of productivity applications accounts for about 60% of Microsoft revenue.

Microsoft executives have said they expect the emergence of subscription-based licenses to be revenue-neutral. But Le Tocq said competition from Web-based productivity tools like Sun Microsystems' forthcoming StarPortal may put pressure on prices.

Meanwhile, several ASPs are offering Microsoft Exchange as a hosted service. Denver-based Qwest Communications, for instance, charges $15 per month per user.

At an event this spring, Microsoft will introduce its Next Generation Windows Services, which is being directed by Chief Software Architect Bill Gates. It will provide a way to access Microsoft products from a browser.

ASPs are already giving Microsoft's Windows 2000 high marks as a server environment. "Windows 2000 is a fantastic platform for ASPs," said Deepak Swamy, vice president of marketing at Florida-based TeleComputing.

Microsoft is also investing in a growing list of ASPs, internet service providers and telecommunications companies. Recent investments include minority stakes in Jato Communications in Denver and WinStar Communications in New York, which both offer high-bandwidth internet and services to enterprises.

At the same time, Microsoft is developing its own hosted service. The bCentral small business portal, launched last fall, will soon offer Microsoft Office Online. "Microsoft is very much toying with the idea of becoming an ASP or acquiring an ASP," said Lew Hollerbach, an analyst at Aberdeen Group in Boston.

Robert Rubin, senior vice president and CIO at Elf Atochem North America in Philadelphia, said he doesn't believe the ASP model makes much sense for large enterprises yet. He said he might consider it for applications that will be used for only a short time or are used by a small group - not for Microsoft applications.

But Jack Riley said the ASP model is appealing to him. Riley is vice president of business development at Encino, California-based Metrociti Mortgage, which outsources its core mortgage software and Office 2000 to Irvine, California-based FutureLink.

"We've been growing at a rate of 50 per cent per year," said Riley, and relying on an ASP lets the company's systems scale without ramping up information technology staffing.

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