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Microsoft’s software as a service moves — a slap to the channel?

Steve Ballmer, in an interview with the India Economic Times, said that while he still sees a place for traditional software distribution, “I would say we are moving to a world where there is a lot more electronic distribution. It is a new style of software, not the old-style distributed electronically.”

No surprise there–Microsoft is facing increasing competition (especially for its Office suite) from downloadable software, most of it free. Google is moving into the space with web-based services. Salesforce.com and other software-as-a-service players have proven the model works for pay as well, and service provider USinternetworking has done well enough at delivering others’ software (including PeopleSoft, Oracle, and other packaged applications) as services that AT&T acquired them.

But Microsoft’s play is something entirely different. Right now, Microsoft depends on its partners for more than 90% of its revenue–and its Live efforts could dramatically change that. Windows Live (and more specifically, Office Live) could put Microsoft into direct competition with many of its current channel partners for business from small and medium companies — especially those partners who have already started to provide hosted services for customers.

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