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Deep in the heart of Texas lies a shimmering new, massive Microsoft data center designed specifically for delivering hosted and managed services, such as Windows Live and Office Live. The San Antonio facility is one of several new data centers being built around the world by the software giant, which aims to transform its model to utility computing.

San Antonio-area solution providers say the facility is precisely what Microsoft needs to compete in the burgeoning managed and hosted services market. And that’s what makes them nervous. Of all the traditional hardware and software vendors entering the services market currently supported mostly by the channel, Microsoft is perceived as the biggest competitive threat.

Top Threats to Cloud-Based Services

In the Channel Insider 2008 Managed Service Study, solution providers ranked the following vendors that posed the biggest threats to their services business over the next two years.

Microsoft 37.40%
IBM 23.20%
Dell 21.30%
Cisco Systems 13.50%
Google 12.30%
Verizon 8.40%
AT&T 7.10%
Amazon 4.50%
Ingram Micro 2.60%
Other 10.30%

According to a Channel Insider survey of 300 veteran managed services companies (those that have been delivering managed services for 18 months or more), 37 percent of the channel community says Microsoft will take or inhibit more of their services growth over the next two years.

Microsoft’s threat perception numbers dwarf both IBM and Dell (23 percent and 21 percent, respectively). The Dell numbers are surprisingly low considering that it recently announced an expansion of direct managed services offerings to the New York Metro market and plans to continue adding new markets in the near future.

Comparatively speaking, Google is not perceived as a significant threat, as only 12 percent of solution providers cited it as a rising competitor. While the big telecommunications companies are offering an increasing amount of network and security services, solution providers are not bumping into them in deals.
Ingram Micro, the world’s largest distributor, continues to press its Seismic program of hosted infrastructure that solution providers can use for their managed services offerings. For the most part, solution providers trust the distributor’s pledge that it won’t take those services direct.

And Amazon’s continued expansion beyond books and consumer goods into cloud computing and storage isn’t seen as a threat, as yet. In fact, many solution providers are using Amazon’s Elastic Cloud Computing platform to build and deliver services to their clients. 

It’s no secret that Microsoft wants a larger piece of the managed and hosted services market. At its Worldwide Partner Conference in Houston last July, Microsoft unveiled revenue split models for its hosted services, in which partner solution providers would receive 12 percent of the total contract in the first year, and 6 percent recurring fees for the subsequent years of the engagement. For the most part, Microsoft partners were underwhelmed, considering their own managed and hosted services produced margins of 30 percent and more. Other hosted and master managed services providers are also paying significantly higher rates to partners.

The software company is expected to unveil more of its plans this week at the Professional Developers Conference in Los Angeles. The next target: the cloud. And Microsoft’s threat isn’t being taken lightly by its rivals. Both Rackspace the Amazon made significant announcements last week in advance of PDC in an attempt to take the wind out of Microsoft’s sails. According to Phil Wainewright’s blog, Rackspace is fully embracing the cloud for its next generation of hosted services, while Amazon is finally taking the "beta" label off its EC2 service.

According to the Channel Insider 2008 Midyear Outlook survey, managed services and software as a service are seen among the product and services offerings that will retain their profitability during a recession. Because everyone is anticipating a drop in software and hardware sales, solution providers are worried that vendors, most particularly Microsoft, will try to take more of those dollars away from them.