By Paul DeGroot [Bio]
Posted: Feb. 11, 2002

Faced with wholesale collapse among its application hosting partners, Microsoft has moved to assist them with a new licensing program that will reduce their costs. At stake is not only the market for Microsoft’s current products as hosted applications but also a key channel for delivery of future .NET-based services.

The new Services Provider Licensing Agreement (SPLA) updates the Application Services Agreement (ASA) launched in Aug. 2000. The new agreement offers lower prices, more flexibility, greater price stability, and a Web-based reporting system for licensees.

Microsoft’s Hosting History

The application hosting concept, which gives users access to outsourced applications via terminal services or Web browsers, grabbed the spotlight in 1999. Because applications run on servers managed by an application service provider (ASP), they are easier to manage and upgrade, and customers require less-powerful PCs and fewer technical staff.

This model posed a quandary for Microsoft. On one hand, it threatened the company's traditional business by reducing the need to run local copies of products such as Office and by opening business applications to Web browsers running on any operating system. On the other hand, ASPs presented a possible market for Microsoft servers and matched some of its executives' vision of "software as a service."

To reduce the threat that hosted applications would cannibalize sales of traditional products, Microsoft set prices high (ASPs typically paid more for an application than a volume licensing customer) and reserved the right to change them on short notice. But the company also hedged its bets in case the ASP market took off, making significant investments in many ASPs so they would host Microsoft applications.

Although Microsoft’s investments were welcome, its high licensing fees limited sales and contributed to the ASPs' money-losing business models.

Today, every one of the small, pure-play ASPs in which Microsoft invested has been knocked out or is on the ropes. The knockouts include Broadband Office and USWeb/CKS (merged into the now-defunct marchFirst). Concentric Networks, Data Return, Futurelink, and Winstar have been acquired by other companies at rock bottom prices or in connection with a bankruptcy sale. Commtouch, Corio, Digex, Interland, and Interliant are all losing money. USinternetworking is reorganizing under bankruptcy protection.

Even the ASP Industry Consortium has been folded into CompTIA, a technology industry standards organization.

The Need for Hosting

The grim ASP picture is more than a sad chapter in Microsoft’s investment strategy; it poses a significant danger to Microsoft’s .NET and Web services vision.

That vision includes, among other things, "federations" of servers offering Web services such as calendaring, e-mail, and document sharing. Today’s ASPs would be likely candidates to host these servers, but most are so preoccupied with basic survival that launching new services on an untested platform is unlikely.

In addition, although Linux is not significant competition to Microsoft on the desktop, its lower cost is attractive to ASPs. Hosted applications, such as e-mail or databases based on Linux, threaten Microsoft’s most promising growth areas.

SPLA Terms

The SPLA offers ASPs a more attractive licensing regime in several ways.

Lower prices. Although Microsoft has not released the new pricing publicly, reports suggest that prices have dropped between 25% and 33%. SQL Server 2000 Enterprise Edition, for example, has gone from US$999 per month per processor to US$669, a 33% reduction. The cost of a "Subscriber Access License" (SAL) for an Exchange-based collaboration package has been reduced 26%, from US$4.39 to US$3.25 per month. ASPs also are no longer required to pay for the latest version of Microsoft software (even if they do not use it), but can license a particular version and stay with it.

Price stability. Under the older ASA program, prices could be changed on 30 days' notice, and although Microsoft never raised its prices on such short notice, ASPs found it difficult to get customers to sign long-term service-level agreements with open-ended pricing. One of the benefits of the ASP model, after all, was supposed to be predictable IT costs. Microsoft says the current price list will not be changed until 2003, and future price changes will be announced no more frequently than once a year.

Easier reporting. A new Microsoft Order Entry Tool for ASPs will make it easier for ASPs to report usage to Microsoft.

Processor, Subscriber Licenses

The SPLA preserves two types of license for ASPs: per-processor licenses and SALs. Some products can be licensed either way, while others are available in only one form.

For example, SQL Server can be licensed per-processor (US$169 per month), or the ASP can license a single copy of the server application and license it to customers by using SALs (US$5.99 per month for each individual accessing the server).

Availability and Resources

The SPLA is only available to Microsoft Certified Partners. Information about that program is at www.microsoft.com/partner/partnering/certified/.

The main site for service provider licenses is at www.microsoft.com/serviceproviders/licensing/.

A list of products and the type of licenses available can be found at www.microsoft.com/serviceproviders/licensing/product_license_listP112532.asp.

A market bulletin describing the SPLA is at http://www.microsoft.com/serviceproviders/licensing/Market_bulletin--ASPv2%20final.doc.