What the Tellme deal says about Microsoft

It's been more than 15 months since Bill Gates and Ray Ozzie touted a "Live" services push, but many company watchers are still waiting to hear a more clear strategy for how Microsoft plans to compete with advertising-funded rivals like Google and subscription-based companies like Salesforce.com.

Last week's deal to buy Tellme Networks, however, could help add more substance to its rhetoric.

"Tellme does things that Microsoft hasn't traditionally done," said Charles Moldow, a former senior vice president of sales for Tellme and now venture capitalist at Foundation Capital. "Tellme doesn't ship software. Tellme sells a service."

That service allows businesses to run voice-activated telephone systems without having to install their own servers. Tellme hosts the set-up from its data centers and gets a small fee for each call that it handles. Microsoft offers a competing product--Speech Server--but it is sold in the traditional Microsoft way: Companies buy a license for the server software and run it on their own equipment.

The fact that Tellme has a different business model was part of its allure, said Microsoft Business Division president Jeff Raikes.

"One of the many benefits that we're excited about with our acquisition of Tellme is that they bring with them a proven hosted service business," Raikes said in an e-mail.

For some months now, Microsoft has been saying that businesses aren't going to want to get software only as a hosted service. Instead, it argues customers want a mix of traditional software and hosted products, something the company has dubbed "software plus services."

Adding a service-based option is a good thing for Redmond, but Moldow said it still could be challenging. "I think it's a huge plus, but you have to get your head around it," he said.

In a speech at Stanford University last week, CEO Steve Ballmer acknowledged that adjusting to new business models is one of the toughest tasks he has faced in running the software giant.

"Learning a new business model or developing a new business model is so hard," Ballmer told a crowd of business students.

Indeed, most of the business services Microsoft offers today have come through acquisitions. Microsoft's Placeware acquisition is now the Live Meeting service, while FrontBridge Technologies is now Exchange Hosted Services.

But the company has also quietly added a variety of other services as well. In some cases, Microsoft plans to offer the services itself, while in other areas it is letting third parties do the hosting. With its Exchange Server e-mail software, for example, Microsoft makes it easy for partners to offer the software on a monthly subscription basis. Some 20 million mailboxes are handled in that way.

A "raw deal" for Microsoft?
Microsoft also has been testing a service in which large companies hand over desktop support duties to Microsoft. The effort, at one time part of Microsoft's internal IT department, is now part of the Server and Tools business and is known as Microsoft Managed Services. It handles duties for at least two companies, Energizer Holdings and XL Capital.

Recently, Ballmer said the company also plans to test a more limited service in which Microsoft hosts Exchange, SharePoint and Office Communication Server for large customers. Rosoff said he expects Microsoft to begin offering some service commercially from the managed service effort sometime this year.

The software giant has also announced plans for a hosted version of its CRM product as well as for a variety of "Live" services for consumers and small businesses.

There's actually quite a bit Microsoft has been doing in this area, said Matt Rosoff, an analyst with market researcher Directions on Microsoft. "In some cases Microsoft gets a raw deal when it comes to online services," he said. "Everyone assumes Microsoft doesn't get online services. I think they do."

In some ways, Microsoft was ahead of its time in thinking about the shift of software. The company held a strategy meeting in the mid-1990s on how it needed to rework its business for the coming change.

"Software as a service was a theme of a company meeting nine or 10 years ago where we heralded the idea that packaged software was done and now it was just all going to be shipped over the Internet," Chairman Bill Gates said in a 2005 interview with CNET News.com. "In fact, like many things around the Internet that were predicted to happen quickly, they are simply things that take more time."

But others argue that the time for such services arrived some time ago and say that Microsoft is late to the party.

For his part, Rosoff said that Microsoft appears to be adding services where they make sense and that he doesn't see the company dramatically shifting its business.

"It's safe to say the vast, vast majority of revenue still comes from software licenses," said Rosoff. "I don't actually expect that to change."