Microsoft cuts price, still lags in hosted CRM

When Microsoft Corp. began shipping its new Dynamics CRM 3.0 update last week, it also tweaked the software's licensing structure to encourage more partners to offer the CRM (customer relationship management) system as a hosted, subscription service. But Microsoft's change is essentially a cosmetic one: The architectural overhaul necessary to make Microsoft a true force in the on-demand software market won't happen until Dynamics CRM's next update, scheduled for release no sooner than 2007.

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Microsoft's CRM 3.0 launch included the unveiling of a subscription licensing option for partners, allowing them to essentially rent Microsoft CRM licenses to customers for US$24.95 per month, per user. The move is aimed at making Microsoft's offering more competitive with the subscription services run by other applications vendors -- most notably, Salesforce.com Inc. and Siebel Systems Inc. Those vendors sell their hosted, managed services on a subscription basis, with costs starting as low as $65 per month, per user.

Microsoft has long had a handful of partners offering its CRM software as a hosted, managed service, but it hadn't officially offered a subscription licensing option. In most cases, customers interested in taking advantage of partners' hosting services still had to pay up front for licenses, which start at $622 per user for Microsoft's Professional Edition. By encouraging partners to offer subscription licensing options, Microsoft hopes to woo small companies that would be put off by high start-up costs.

For customers, though, the change is likely to have little real effect. One of Microsoft's flagship hosted CRM partners, NaviSite Inc., already had a private deal worked out with Microsoft to allow it to offer subscription licensing terms. NaviSite's hosted CRM clients number about a dozen, and roughly 80 percent of them chose to buy licenses rather than renting them, according to Mark Clayman, NaviSite's senior vice preside of service delivery.

NaviSite began offering subscription licensing last year, charging $122 per month, per user, for its hosting services and Microsoft's license. For customers that already own their Dynamics CRM licenses, NaviSite charges $99 per month, per user, for hosting.

"In the beginning there was some traction, but it has slowed down a bit," Clayman said. "I think there will be more interest now that it's more widely announced. I think there will be quite a few more companies that want to try out the software rather than making the long-term purchase commitment."

Microsoft's small list of companies currently offering hosting services for its CRM software includes NaviSite, in Andover, Massachusetts, Aspective in the U.K. and CRM Resultants in the Netherlands. Microsoft expects to expand that list after it officially begins offering its subscription licensing terms to partners on Jan. 1, according to a spokesman from the company's public relations agency, Waggener Edstrom Inc. (Microsoft declined to make a company executive available for this article.)

The big hurdle for Microsoft, though, is that its software isn't designed with the multi-tenant architecture that allows providers to benefit from economies of scale with hosted applications. Each customer organization requires its own server and dedicated database.

That will change in Microsoft's next CRM update, code-named Titan, according to Microsoft and NaviSite, which has been working closely with Microsoft's developers. Still, Titan isn't due for at least another 15 to 18 months, according to Microsoft's public relations representative, and details about what will be in that update are vague.

Until it offers multi-tenancy, Microsoft won't be a serious player in the on-demand applications market, Yankee Group Inc. analyst Sheryl Kingstone said. She also thinks customers would like to see Microsoft offer hosted, subscription-priced applications directly, not only through its partner network. "There's absolutely a demand for that," Kingstone said.

Microsoft has sent a muddled message about how it wants to approach the growing market for managed, Web-based applications, popularized for consumers by Google Inc. and for businesses by Salesforce.com. Microsoft's recently launched Live initiative and Ray Ozzie's famed memo about "The Internet Services Disruption" indicate that Microsoft wants all of its divisions to adopt a services strategy. But the company's lagging pace in the hosted CRM market has left it playing catch-up behind smaller, nimbler vendors.

Kingstone suggested that if Microsoft is serious about the on-demand market, it should buy a company such as RightNow Technologies Inc., a hosted CRM vendor that focuses on service and call-center technology.

Meanwhile, NaviSite's Clayman thinks Microsoft's challenge is to make more customers aware that its CRM system can be used as a hosted, subscription service. "At this level, the pricing is not that significant," he said. "The prices [of all the on-demand CRM vendors] are getting so close it's coming down to features, and there are a lot of customers that want Microsoft's features."