Exchange, Microsoft’s e-mail server product, has been available since 1996 and is second only to SQL Server in generating server application revenues for Microsoft. Furthermore, it is now the dominant corporate e-mail server, with roughly 50% market share in terms of mailboxes served. Although the corporate e-mail server market is fairly stable, and it will be difficult for Microsoft to drive its share higher, the company cannot afford to sit on its heels either: Exchange is a strategic product and it is vital to keep current customers upgrading to new versions, both to keep revenue coming in and to ensure that it remains competitive.

Exchange’s primary client program, Outlook, is also an extraordinarily successful product and is in a similar position. Whether because of its popularity with users, its inclusion in the Microsoft Office suite, or the free Outlook licenses that come with Exchange Client Access Licenses (CALs), Outlook is the market-leading e-mail client, used on more than 60% of all PCs. New features in Outlook could help drive Exchange upgrades and Office upgrades as well.

Exchange 2003 is intended to sustain Microsoft’s momentum in the messaging and collaboration space. Although the combination of Exchange and Outlook is the market share leader in the corporate e-mail space, Microsoft still faces strong competition from IBM/Lotus’s Domino server and Notes client, and an assortment of standards-based e-mail server products such as Oracle’s Collaboration Suite and Samsung’s Contact (formerly Hewlett-Packard’s OpenMail) product. In addition, many organizations still have not upgraded their Exchange 5.5 servers to Exchange 2000, a major redesign of Exchange that shipped in fall 2000, mainly because upgrading requires them to first migrate from Windows NT 4.0 domains to Windows 2000’s Active Directory (AD). With Exchange 2003 and Outlook 2003, Microsoft hopes to induce customers to upgrade and thereby drive sales revenues, as well as to convince customers with Software Assurance or Enterprise Agreements that cover Exchange that their investment in these prepaid upgrade programs provides good value.

Benefits for Users and Administrators

The improvements to Exchange and Outlook will appeal to both users and administrators. Users get an improved interface and better access to their e-mail while out of the office or connected over a wireless network, and they need no longer suffer an inferior experience when using Outlook Web Access (OWA), Exchange’s Web-based client, as compared to using the regular version of Outlook. Administrators get improved security, scalability, availability, recoverability, and manageability. However, Exchange still has some of the limitations that hobbled earlier versions, and some functionality has been removed from the product.

One of the most important changes is not technical but involves licensing: as Microsoft did with the new Windows Server 2003 per-user CALs, it will finally offer per-user Exchange CALs, in addition to and at the same price as the per-device CALs it has traditionally offered. This will allow a user to access e-mail from a variety of devices, including PCs, wireless Pocket PCs, and Smartphones, without the organization having to buy a separate CAL for each device. However, unless organizations have purchased Software Assurance for Exchange and Windows servers and CALs, upgrading could be prohibitively expensive now that version upgrades are no longer available.

A Stopover on the Road to Kodiak

Exchange 2003 is intended to hold Exchange customers until the next major release—code-named Kodiak and due out in 2006—introduces major changes. In particular, Kodiak will introduce new APIs, built-in Web service support, and support for 64-bit processors. It will also introduce storage, indexing, and search technology based on the upcoming SQL Server database engine, code-named Yukon. This engine will replace the Web store introduced in Exchange 2000, which improved scalability over previous Exchange storage technologies but still suffers from architectural limitations.

Kodiak is crucial to Microsoft’s continued long-term success in the messaging space, and its radical architectural changes are intended to make Exchange scalable enough for service providers to serve thousands of customers and millions of mailboxes without requiring them to maintain large numbers of e-mail servers. However, with Kodiak so far off, potential customers will have to determine if Exchange 2003 will adequately meet their needs over the next several years.

What’s Ahead

The first section of this report, "Improved Support for Mobile Exchange Users," focuses on Exchange 2003 and Outlook 2003 changes that affect users directly, especially mobile users.

The second section, "Exchange 2003 Boosts Performance, Eases Administration," focuses on improvements of importance to IT planners, administrators, and developers—mainly improved security, scalability, availability, recoverability, and manageability.

The third section, "Pricing and Licensing," covers pricing and licensing information on Exchange 2003 and Outlook 2003, including the new per-user licensing model.

The fourth section, "Next Major Update: Kodiak," gives a glimpse of what’s known about Kodiak, the version to follow Exchange Server 2003.

The last section, "What to Do Next," gives general guidelines on when to upgrade and related issues.