Microsoft embraces Web with hosted services

Hosted business productivity services could be more significant to Microsoft's bottom line in the long run.

Though the quest to acquire Yahoo dominated news surrounding Microsoft's Web strategy in 2008, another story was brewing quietly behind the scenes that could be even more significant for the company in the long run -- its move to offer hosted business productivity services.

The company makes much of its revenue from selling software licenses to enterprises. Those customers are starting to see value in using software that's hosted remotely on the Web -- or in "the cloud" -- and less in building out expensive IT systems in-house, which is becoming even more cost-prohibitive now as economies around the world falter.

Even as it attempts to battle Google for a share in the online advertising market by offering hosted consumer services, Microsoft is keenly aware that the needs of its business customers are changing. In 2008, Microsoft delivered on a strategy it unveiled several years ago and offered the first hosted versions of key software infrastructure -- Office Exchange Online and SharePoint Online. The company plans to roll out hosted versions of Office Communications Server and Live Meeting in early 2009.

These services, even more than its online advertising strategy, indicate that Microsoft is embracing the Web as a business model and could be more significant to the company's bottom line in the long run.

"When Microsoft says, 'We are willing to make a change in how we do our core business,' that's a pretty big deal," said Matt Rosoff, analyst with Directions on Microsoft.

He said if Microsoft can get "some of its traditional big customers to online services," that revenue stream could be far more important to the company than online advertising revenue, at least in the short term.

"From Microsoft's perspective, that's much more significant than the whole search thing," Rosoff said. Search and online advertising revenue is "the future," he said, but Microsoft stands to gain much more from its enterprise customers that buy hosted services in the near term.

As the year closes, Microsoft's future in search isn't looking too promising. A comScore Networks report on online search market share in November gives Microsoft's Live Search 8.3 percent -- matching a low for the year the company also hit in August -- while Google had a commanding 63.5 percent of online searches. A deal for Microsoft to purchase either Yahoo's search business or the entire company also is still up in the air and widely rumored to be in the works as the end of 2008 approaches.

Hosted business services, however, is an area where Microsoft has an edge over Google, since Microsoft already owns many of the enterprise customers that would purchase them. Google has a tougher play with its own hosted business productivity services, since it has not proven yet it can compete in the enterprise market and does not have years of a successful software business to back it up.

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