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Microsoft-Commtouch deal endorses online messaging

With its investment in email and messaging software firm Commtouch Software, Microsoft is hedging its bets against Web offerings that could eat into its core software business.

With its investment in email and messaging software firm Commtouch Software today, Microsoft is hedging its bets against Web offerings that could eat into the giant's core software business.

Microsoft will offer the Silicon Valley firm's email services to its Microsoft Network business customers and affiliates in the United States and overseas. If a company with its own co-branded MSN page wants to offer its own free email services, it can do so using Commtouch's technology.

These products compete with existing Microsoft services like Hotmail and the company's Outlook and Exchange email software suites. But according to analysts, the software company needs to cover its bets online now that other Web-based applications services--such as Critical Path and Mail.com--have begun making inroads into the business market.

"At that point it begins to be a threat to Microsoft's regular business," said Mark Levitt, an industry analyst with International Data Corp. "When that happens, Microsoft has to respond in some way."

Commtouch's stock jumped more than 30 percent by the close of trading today on news of the Microsoft investment, climbing to 49.12.

The outsourced email and messaging business has taken off in the past several years, as Internet service providers, telephone companies, computer companies and others have begun offering their customers free email. But analysts say this is just the beginning; other applications, ranging from calendar services to full-blown office software suites, also will be available for rental or free use online.

This budding applications service provider (ASP) market has yet to make strong inroads to the corporate world, although free email and basic scheduling and address book functions have been a core part of consumer portals like Yahoo for more than a year.

Microsoft itself has been one of the leading free email providers through its Hotmail service, and it also has its eyes on the ASP market. Last month it said it would rent use of its Microsoft Office suite online through a business-focused arm of MSN.

It's this profitable business market that the company is watching most closely, rather than the consumer-oriented free email business, analysts said. But the early use of Web applications like email could serve as a bellwether for the success of Microsoft's more complicated software applications online, they added.

With one foot in the Web outsourcing market with today's 4.7 percent stake in Commtouch, as well as an in-house component running through Hotmail and MSN, Microsoft will be able to track the market without committing itself too early.

"[Applications hosting] is a market that has prompted a lot of interest, but it is not clear how quickly it's going to take off," Levitt said. "Microsoft can experiment in this way and then be ready to pounce when the market takes off."

Hotmail, despite its popularity, has been dogged with problems in recent months. Analysts said Microsoft would be able to learn some application hosting lessons from its new affiliate.

Commtouch chief executive Gideon Mantel said his company would be able to fill in some holes in Microsoft's email and messaging hosting business, adding that the company would be complementary to the software giant's own services, such as Hotmail.

"In reality, there's not a company that can do everything by themselves," Mantel said. "But this is not going to be in any shape or form a replacement for Hotmail."

Analysts also noted that Microsoft has another, more parochial interest in endorsing Commtouch: It's one of the only application hosting companies that uses the software company's Windows NT products, bucking an industry perception that the operating system isn't solid enough for huge Web tasks.

"Almost every other outsourcing provider says NT can't scale and they need Unix," Levitt said. "[Commtouch's perspective] is something [the other providers] want to see more of."