Microsoft turning to HP

Scalability problems with its Exchange messaging server are losing Microsoft sales to large companies and driving it into a marriage of convenience with Hewlett-Packard in an attempt to find a fix right away.

Microsoft and HP are now working out the details of an agreement that will let the two companies work together to sell a new, more scalable Exchange architecture to Fortune 500 companies, according to sources close to the negotiations.

These large companies require a messaging system that support thousands of users in hundreds of locations. Microsoft has been trying to compete with Lotus Development and its Notes groupware and messaging offerings, but Exchange's well-documented problems in scaling up to large-scale networks has been costing the company sales.

HP, for its part, has also been faced with stiff competition from Lotus in bids for large multinational companies, traditionally HP's stronghold. The companies now think that they can combine two wrongs into a right by working together to create a new Exchange architecture specifically for large enterprises.

HP officials declined to comment on the negotiations. Microsoft representatives did not return phone calls.

The plan calls for Microsoft and HP sales executives to team up on sales to large companies. The combined sales team will offer a new three-tier architecture that proposes to keep Exchange's user-friendly interface and links to the rest of Microsoft's BackOffice package while scaling up to support thousands of users.

It will work like this: any email client that supports Microsoft's MAPI protocol for messaging will connect to an Exchange server, just as it does now. The new part is that the Exchange server will plug in to HP's OpenMail, which would act as a sort of backbone for the messaging network. This would help the scalability problems because OpenMail is known for its ability to support large numbers of users on one server.

Microsoft, of course, has the hard task of announcing a deal with HP without overtly admitting error or weakness with Exchange. Microsoft officials have been claiming that they can run several thousand users on an Exchange Server, but the truth is closer to 500 because its message store has a capacity of only 16GB.

This means that if each user is apportioned about 25MB of space on the store, the server can support only 500 users, said Dan Blum, a principal of consulting firm Rapport Communication.

In exchange, HP may abandon a version of its OpenMail for Windows NT that shipped this month--which could potentially compete with Exchange--while Microsoft will endorse OpenMail for Unix.

Microsoft observers familiar with its high-end strategy say the deal may help Exchange but will probably be seen as a blow to the company's relationship with Digital Equipment, which has been Microsoft's most-consistant partner in developing packages for enterprises.

"This is a shot in Digital's foot," said Tim Sloane, an analyst with research firm the Aberdeen Group.

Microsoft and Digital signed a deal last year that called for Digital to migrate its installed base of All-in-One users to Exchange. Microsoft also asked Digital to scrap its MailWorks on Windows NT to avoid competing directly with Exchange just as it is doing now with HP, said Joyce Graff, research director at Gartner Group.

Since then, Digital discovered that the deal with Microsoft hurt its credibility with messaging users, who wondered why Digital was all of a sudden switching its support from its own product--which as 5 million to 7 million users--to Exchange.

For whatever reasons, the partnership failed to bring in any tangible gains for either company. When Microsoft decided it needed to come up with a quick fix for Exchange's scalability problems, HP was a fairly obvious choice because the company has a strong reputation in messaging and a long history of striking similar partnerships.

While its relationship with Microsoft only made Digital seem weaker to many customers at a time when the company's reputation was already damaged by disastrous financial reports, HP is widely perceived as a strong industry player on both the hardware and software fronts.

But even though HP may not arrive with Digital's baggage, some analysts noted that Microsoft can't be counted on to be any more loyal to HP than it has been to Digital.

Ron Rassner, vice president of marketing at Creative Networks, however, sees the alliance between HP and Microsoft as one of equals.

"Both would gain. HP would get Microsoft's sales force, access to its Exchange environment, and a wider installed base. Microsoft, for its part, will continue its drive to establish and maintain NT as the operating system," Rassner said.

HP, too, will get increased visibility in accounts that might otherwise never have looked at it, said Sloane. He advises HP to tie the management of the proposed system to the OpenView management platform, a tie that would make it harder for Microsoft to part ways with it down the road.

But most analysts warn users who invest in the new system that HP's involvement in setting up Exchange sites may not be permanent.

"If HP wants to dance with the devil and keep some of its accounts, it's fine," said Mark Levitt, senior research analyst at International Data Corporation. "But they should be aware that Microsoft is looking out [only] for itself. Down the road. they'll say Exchange is strong enough, and jettison OpenMail."