Hosted Microsoft applications and services, such as CRM Live and Office Live, have caused concern among Microsoft partners that the company wants to dominate the market for Web-based applications. At the same time, the company has evolved its policies for partners hosting Microsoft-based solutions in hopes that its platforms will be used widely for hosted solutions, regardless of who's hosting them. In the last two years, Microsoft has released tools and offers intended to spark interest among development partners in hosting their own solutions, or in making their own "software as a service" (SaaS) offerings available through other service providers.

Evolution of SaaS

Microsoft has taken a series of steps to make its product line more accessible to customers who prefer to pay a monthly fee for access to hosted applications.

Microsoft has given various names to such programs over the years, beginning with its Application Service Provider program in 2000, followed by its Service Provider Licensing Agreement (SPLA) in 2001. These programs made it possible for service providers to host a wide range of Microsoft products and to offer them to customers at low monthly rates, such as about US$3 a month for a hosted Exchange mailbox.

However, ISVs who wanted to do something similar with their own applications built on the Microsoft platform found the licensing rules more difficult. Many of them build software intended for on-premise (nonhosted) use and incorporate Microsoft applications into their own applications through Microsoft's ISV Royalty Licensing Program. That program lets them bundle a Microsoft application into their own application, such as creating a financial system that stores data in SQL Server, and sell the combined solution to customers at a single price, with a single install. The ISV pays Microsoft a royalty for each copy of the Microsoft application that ships with their application.

But the rules of the ISV royalty program made it difficult for hosting companies to host such applications, or for ISVs to offer them to customers for a monthly fee. That made it tough for Microsoft partners to create a single version of their application that could be offered as both a hosted service and an on-premise solution.

Bringing ISVs, Hosting Together

Since 2005, Microsoft has changed its licensing programs and offerings for ISVs and service providers to allow service providers to resell hosted ISV applications that include Microsoft software, and to allow ISVs to host their own applications that include Microsoft components.

ISV Royalty Amendments

In 2005, Microsoft amended the ISV Royalty Licensing Program by permitting ISVs to provide their applications—including Microsoft components such as SQL Server—to a service provider who could host the ISV's application and the included Microsoft component. The amendment resolved the following problems:

ISV Royalty didn't cover hosting. The old royalty program did not permit ISVs to redistribute Microsoft software to a hosting company for use with the ISV's application. Even if the program had permitted redistribution, the requirement to pay Microsoft a royalty for any Microsoft component redistributed to a customer would have made it impossible to offer inexpensive hosted solutions to a large number of customers.

The SPLA didn't cover bundled Microsoft applications. Hosters using the SPLA were not permitted to offer ISV applications that included Microsoft software which would otherwise require separate licensing.

Under the amendment, ISVs are permitted to distribute their applications to hosting services without paying royalties for the Microsoft components included in their application. Microsoft instead gets its payment from the service provider, who pays the normal SPLA fees associated with the Microsoft components. For example, a hoster that offers an ISV solution including SQL Server would pay the ISV a fee for its application and Microsoft a fee for SQL Server, but the end customer would pay only a single monthly fee for the combined products.

ISV Hosting for Applications

In May 2006, Microsoft released Hosting for Applications, a collection of applications and documentation intended to make it easier for companies to host applications on the Microsoft platform. The platform includes Microsoft Operations Manager and the Microsoft Provisioning System, which automates routine tasks such as creating new user accounts and provisioning new applications.

By positioning Hosting for Applications as an option for either hosters or ISVs, Microsoft is encouraging ISVs to offer their applications on a hosted basis. (To do so, ISVs must also sign the SPLA so that they can pay Microsoft directly, according to the SPLA fee schedule, for using Microsoft components in their applications.)

In Nov. 2006 the company sweetened the deal for ISVs with the SaaS On-Ramp Program, intended to eliminate upfront costs for ISVs who want to try hosting their own applications. The program gives ISVs access to up to eight Windows Server licenses and two per-processor SQL Server licenses on which they can host their own applications. ISVs can use the products for 30 days for free, and up to a year at a discounted rate. ISVs must also sign the SPLA so that if they continue past the 30-day period, they make monthly payments to Microsoft based on the number of users they sign up.

The discounts will be welcome for ISVs who have not tried hosted services, allowing them to experiment with hosting their applications at almost no incremental cost. The SaaS On-Ramp will be most attractive for ISVs whose applications require significant horsepower, since it covers multiple Windows and SQL Servers.

However, On-Ramp represents only an incremental opportunity for Microsoft ISVs. For ISVs who build applications from the ground up for use over the Web, the cost of hosted services that use important applications like SQL Server is already low: ISVs can already host their applications on the free SQL Server Express product, for example, and a hosted Web server with the more powerful SQL Server 2005 Standard Edition can be purchased from a hosting service for as low as $30 a month.

Keeping Microsoft in the Game

Given the dramatic rise in the quality and quantity of hosted applications from competitors such as Salesforce.com, Google, and others, and the fact that its own hosted services, such as the Live services, are still in their infancy, Microsoft needs allies who support its platform, instead of popular non-Microsoft technologies, such as Linux and the open-source MySQL database.

While the SaaS On-Ramp Program is more likely to capitalize on existing interest in hosted applications rather than build new interest in them, it does suggest that Microsoft is serious about promoting partner participation in SaaS offerings.

Resources

The SaaS On-Ramp Program is described in more detail at www.microsoft.com/serviceproviders/programs/saasonramp.mspx.

Partners interested in the SPLA can learn more at www.microsoft.com/serviceproviders/licensing/default.mspx.

Microsoft's programs and tools for hosted applications are described at www.microsoft.com/serviceproviders/hosters.mspx.