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With its upcoming Solution for Hosted Messaging and Collaboration 3.0, Microsoft Corp. is rolling out a major upgrade to Hosted Exchange 3.0, a product that’s been driving home new revenue to some service providers in a market always hungry for opportunities.

Microsoft is tooling the upgrade to make it easier for rising hordes of Microsoft Exchange hosters to provision new features for SMBs (small and midsize businesses). But service providers are divided over how much demand is out there right now for newly supported capabilities like IM (instant messaging) and file sharing.

The upgrade integrates Hosted Exchange 3.0; Windows SharePoint Services Hosting; the new LCS (Live Communications Server) 2005 Hosting; and a Windows Server 2003-based upgrade to Microsoft Provisioning System, said Morgan Cole, product manager at Microsoft.

Service providers have been flocking to Hosted Exchange over the past couple of years, anyway, due to its growing marketability to SMB customers, said Marcel Nienhuis, a market analyst at the Radicati Group.

Radicati projects the overall mail hosting market to soar from 39 million accounts today to 59 million accounts by 2008.

“SMBs are looking for more out of their e-mail these days. They want to be treated the same way as larger enterprises,” Nienhuis said in an interview with

SMBs are tired of the limitations of POP3 Web mail, he said. On the other hand, many of these smaller companies lack adequate in-house resources for operating sophisticated corporate messaging systems.

Although Lotus Notes and Novell GroupWare are still in the running against Exchange in the in-house messaging market, the same doesn’t hold true within the hosted space, Nienhuis maintained.

With the launch of Exchange 2003, Microsoft’s messaging environment became more secure—eliminating the need for VPNs (virtual private networks)—as well as scalable enough to make economic sense as a hosting platform, according to the analyst.

“There is an economy of scale. If we’re providing Exchange services to 1,000 users, this drives down the costs,” said Ingram Leedy, a partner with service provider Elephant Outlook.

“The attraction for customers is that we do everything for them. We take care of clustering, getting the right storage network, and managing threats such as viruses and spam, for example,” Leedy said.

Exchange hosters also point to drawing cards such as mobile messaging support, especially for BlackBerry devices; collaboration and shared calendaring tools; Outlook Web access; and Microsoft’s pay-as-you-go pricing model for service providers.

Indeed, some providers said they have recently changed their entire business models to dedicate themselves—either exclusively or mainly—to Microsoft mail hosting.

Elephant Outlook, a former ISP, turned its attentions to full-time Exchange hosting just before Microsoft’s release of Exchange 2003, after selling off its own ISP assets to Earthlink, according to Leedy.

MailStreet, another Exchange hosting firm, has roots in Web hosting and development. Don Dimon, managing director, noted that many service providers have abandoned Web hosting after experiencing the futility of “trying to make a living out of $5 [a month] Web sites.”

David Ramon, CEO of USA.Net, said he saw his company’s Exchange hosting service shoot up 50 percent in revenues last year.

But even though they’ve been otherwise satisfied with Microsoft’s messaging environment, some providers haven’t been using the built-in provisioning system in Hosted Exchange.

“In the past, many service providers built their own provisioning systems from the ground up—or perhaps customized a general-purpose provisioning system for use in their Hosted Exchange environment,” said Microsoft’s Cole.

MailStreet, for example, has been leveraging Abridean’s tools. Ensim is another third-party player in this space, Dimon pointed out.

Microsoft has responded with an upgraded provisioning system in Microsoft Solution for Hosted Messaging and Collaboration 3.0, a product slated for release on Jan. 19.

“What we’ve seen transpire over the past 18 to 24 months is a fairly profound shift away from service providers trying to do the software development, since they want to focus on efficient operations, providing a strong SLA, and offering their customers richer services,” Cole said.

Microsoft’s new system includes a tool designed to automate 85 percent of deployment, he said. Also, service providers can now provision services for Exchange, SharePoint and LCS, all within the same integrated environment.

“There are definite advantages to utilizing our full provisioning system, including support for all three of the end customer experiences, a pretested reference architecture and Microsoft customer support for the solution,” Ramon said.

By and large, service providers see no reason to object to the easier-to-use tools. “Microsoft’s been spending a lot of time looking at how to provision new customers and groups,” said Elephant Outlook’s Leedy.

“The idea of hosted Exchange has been gaining respect internally at Microsoft,” observed MailStreet’s Dimon. “Microsoft’s first provisioning system was more like a framework than a tool kit. But now we’ll probably migrate over to the provisioning system in the new release.”

Yet providers express mixed opinions over whether features such as SharePoint file sharing and LCS instant messaging are really that desirable yet to SMBs.

Elephant Outlook plans to integrate both SharePoint and LCS into its hosting services during 2005, starting with SharePoint.

Dimon, on the other hand, said he hasn’t yet sensed much customer need yet for either type of service.

“Personally, I think the IM thing is kind of fluff. People will continue to use whatever they’ve already been using for IM, whether that’s AOL, MSN or whatever. If it’s working for them, why change?” he said.

Ramon believes both types of capabilities will be popular among existing customers, while also luring new business.

“We’re excited, and we really feel these new services are right up there with what people are looking for,” said USA.Net’s Ramon. “Will everyone in an organization require SharePoint or IM? Who knows? But if they do, we’ll have these features available for them.”

In any event, the addition of provisioning support for SharePoint and LCS will help interested providers to differentiate their services from the rest of the pack, according to Radicati’s Nienhuis.

With customers now paying only about $6.99 to $15 a month per user, maybe the Exchange hosting market is maturing to the point where this sort of differentiation is needed.

“The Exchange market is getting highly competitive—with a lot of providers selling the same services at similar prices,” Dimon told