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November 8, 2005 5:09 pm

Microsoft alliance marks generational shift in strategy

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The announcement of a new partnership is rarely an exciting event in the technology industry.

Companies announce partnerships, sponsorships and other co-operations with great frequency, and many grand announcements amount to little more than handshakes and smiles.

Some, though, become solid alliances which help to change the destiny of the industry, and Microsoft is hoping that its recent link with France Telecom could be one of them.

It’s one of a raft of deals Microsoft is making with telecoms companies around the world. These are more than just a marketing exercise – they mark a fundamental shift in the way Microsoft is building its business, says Michael O’Hara, general manager of Microsoft’s service provider business, which targets telecoms companies.

“Everything we sell to service providers comes through me. From BT buying Windows to a complex billing system, that hits my [profit and loss account],” he says. “It is the only fully integrated vertical within the company, which gives you an idea about how seriously we take this space.”

To illustrate further the importance of the business, he points to no lesser authority than chief executive officer Steve Ballmer.

On July 6, Mr Ballmer announced the agreement with France Telecom, saying: “I tell our employees, we grew up on partnerships with companies like Intel and HP and Dell, and for this next generation of innovation the partners are going to look like France Telecom.”

Given how important the telecoms companies are for Microsoft, it’s not surprising that it has been cultivating them as partners.

Network connections are essential to Microsoft’s growth businesses, from handheld devices, the MSN internet portal and hosted business software to online gaming with Xbox Live.

Rather than one-off licence payments, software is increasingly being sold over the internet for a monthly fee. Even elements of the operating system business and Office could possibly move to this model one day. It would certainly have financial attractions for Microsoft.

“They haven’t announced the pricing strategy for the next version of Windows,” says Mr O’Hara. “But the industry trend they are predicting is high revenues for software as a service.”

Telecoms companies will also play a central role in fulfilling Microsoft’s ambition to become a player in the television business, with TV over internet protocol (IP TV) via broadband internet links.

Microsoft is even moving into territory it hasn’t occupied before, writing software for the telecoms companies themselves, to deliver content and services over their networks.

Its Connected Services Framework (CSF) product, announced in February, is designed to make it easier for telecoms companies to offer everything from hosted applications such as e-mail for small businesses, to voice over IP, video games, and video.

Using elements of the same infrastructure for these different services should be cheaper and make maintenance easier.

This takes Microsoft into competition with established vendors such as HP, IBM and BEA Systems, Mr O’Hara says.

Besides France Telecom, SBC Communications, Verizon, BT, and Swisscom, are all signed up as CSF customers. “We expect limited commercial deployments by the end of the year,” says Mr O’Hara.

Taking on well-established vendors in a previously unexplored world like telecoms software is always tough, and Microsoft has found many of its forays into new markets to be uphill struggles. But Mr O’Hara believes Microsoft’s approach is sufficiently different to give it an edge.

“One of Microsoft’s great strengths is its ability to productise things. We have productised the core elements of this service,” he says. "Our differentiator is that we are more productised than the competition.”

In other words, Microsoft doesn’t sell its software as individual pieces of infrastructure which the telecoms companies have to fit together themselves, but as complete applications. If a carrier wants to offer an IP TV service, Microsoft has a single product which can handle every piece of the puzzle, from network to set top box.

The fact that Microsoft makes software for games consoles, set top boxes, PCs and everything else is certainly an additional advantage.

However, the telecoms industry makes particularly rigorous demands on the software it uses. Systems must support many tens of thousands of concurrent users at once, with little tolerance for downtime.

“Microsoft has to overcome the concerns about whether their products are reliable and scalable enough,” says Tony Cripps, analyst at research company Ovum.

Microsoft’s alliances with the telecom companies are not likely to be as influential as its tie-ups with the PC makers and Intel. For one thing, no telco can match those three for global market share or reach.

They also won’t be as exclusive. “Absolutely not,” says Mr O’Hara. “These are wide open architectures. If a company develops a voice over IP service, it will work with ours and vice versa.”

However, Microsoft is depending on these alliances to enter a market every bit as competitive as the PC business used to be.

Mr O’Hara is optimistic. “From our perspective, launching a solution in February and rolling out five tier-one customers in the first five months is an impressive start.”

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