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VARs still unsure of Microsoft Office 365 impact

How much margin Microsoft partners can wring from Office 365 remains a mystery.

The private beta of Microsoft Office 365 beta expanded this week, but VARs still want to know if and how they can make money from the Microsoft-hosted service.

Office 365 includes cloud-based Office Web Apps, Exchange Online, SharePoint Online and Lync. Prices range from $10 to $27 per user per month for up to 25 seats. The higher-end version targets enterprise customers and also offers subscription versions of Office 2010 for Windows, Active Directory Sync and 24/7 phone support.

But, for partners, the biggest question—how much they can make by bringing customers to the service—remains unclear.

Office 365 question: Who owns the customer?

Dave Sobel, CEO of Evolve Technologies LLC, said that Microsoft hasn’t fixed the biggest issue for managed service providers (MSPs) with the Office 365 software as a service model: billing.

“I can’t integrate in our portfolio because we can’t bill for it and it breaks our business model,” Sobel said. “It doesn’t scale; there would be 40 different bills to service providers therefore taking away my value add, which is [acting as a] single point of contact.”

Although Office 365 does not look like a good fit now for Sobel, he’ll keep an eye on it. “I’m still going to watch what happens with it because if they fix the billing problem, then we’ll have intense interest in it,” he said. “The service itself is exactly what you’re looking for because it integrates all the Microsoft platforms.”

Leigh Carpenter, director of strategic services for Nth Generation Computing Inc., a San Diego VAR, said service-oriented resellers have to be aware of what Microsoft and other powers are doing in Software as a Service (SaaS) if only to counsel their clients well.

Would Nth Generation want a piece of the Office 365 action? “It’s a difficult spot. It is a small amount [of money], but as a trusted advisor, we can’t discount it,” Carpenter said. “Office 365 won’t suit every user, but as a consulting type of company, we can do an assessment for them and do the ROI calculation [of Office 365 versus on-premises Office versus Google Apps].

Others are also weighing their options. “I’m not sure what the revenue impact will be because no one has really had much time to kick the tires on it yet,” George Brown, CEO of Database Solutions Inc., said. “We signed up for the [Office 365] beta yesterday, and once we get the credentials, we’ll be all over it.”

“The key is it being able to provide highly available uptime,” Brown said. “There’s also the issue of security: How protected is the data going to be?”

Carpenter agreed. “For any large client considering a move to hosted Office 365, there would have to be stringent service-level agreements (SLAs) in place as well, and that is something else VARs can consult on.”

Partner referral fees?

icrosoft hasn’t detailed Office 365 payment plan for partners but set precedent with the existing Business Productivity Online Standard (BPOS) suite. A partner bringing a customer to BPOS can get 12% margin for the first year and 6% per month thereafter as long as it remains the partner of record. Paul DeGroot, principal consultant at Pica Communications LLC, thinks the IT giant will have continue down that path with Office 365 as well.

“I'd expect that they will continue paying fees. Basically, Office 365 updates and replaces BPOS. I don't know that they've changed the fee structure, but it would seriously dent their business to not pay partners,” DeGroot said. “The fees are already lower than the nominal 18% margin that resellers get for on-premises software.”

Microsoft had no comment on if and how partners  will be compensated on Office 365 sales and a spokeswoman said the company didn’t have anything to announce about “additional billing capabilities “but but we continue to invest in training and technology to help partners find a clear path to success with Microsoft cloud services.  Today, we provide partners with a variety of options in the service, including the ability to manage accounts on a customer’s behalf and insert the partner’s name on the customer’s invoice.”

SaaS offerings hurt traditional partners because they lose the services revenue from keeping on-premises software running. And Microsoft owns the billing relationship, which further distances the partner from the customer.

“Not many partners would stick around to sell O365, especially if the competition, like Google, continued to offer partners a share of the revenue,” DeGroot said.

In fact, Google does give its partners a 20% discount on Google Apps Premier Edition which lists for $50 per user per year. More to the point, with Google Apps the partner “owns the customer, at least in theory,” said one Google Apps partner. That makes Google, long derided as channel foe, more channel friendly than Microsoft at least in this realm, he said.

Zimbra, another online Office competitor, now owned by VMware Inc., also offers partners margin from 15% to 22.5% on its products and renewals.

Office 365 is expected to be generally available later in 2011.

Barbara Darrow, Senior News Director, contributed to this report.

Let us know what you think about the story; email Pat Ouellette, Associate Editor, at , or follow us on twitter.

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