Tech Industry

Microsoft opens storefront to resellers

The company will give software shoppers the option to buy from four resellers at lower prices.

After two years of often-heated controversy, Microsoft this week opened its second online software storefront, giving buyers the option of paying full price to Microsoft or pay lower "street prices" at four online resellers.

Originally code-named Nitro, the program was altered to address reseller concerns that Microsoft eventually intends to bypass them and sell directly to users, cutting out the channel. Those worries remain, but they're hardly limited to software-witness Compaq Computer's current freeze on shipping PCs to online resellers and the online sales efforts of big manufacturers in other industries-Nike, Levi Strauss, Estee Lauder's Clinique, Mattel, and Timex.

"We are not handing off leads, we are taking orders and handing them off to our partners," said Ken Schneider, director of electronic marketing for Microsoft's consumer unit. "We provide a very unique chance for the channel to build buying relationships with the customers we attract to Microsoft.com."

Indeed, compared to direct-to-consumer PC sellers Dell Computer and Gateway, Microsoft is taking a reseller-friendly approach. Specialty chipmaker National Semiconductor is slated next month to announce it will sell directly online, not just via resellers.

But one veteran software analyst doubts that the four resellers on Shop.Microsoft.com, as the site is dubbed, will make any money.

"The resellers will make no margins on sales from that site," said Jeffery Tarter, publisher of the influential Softletter industry newsletter. "Clearly the price war is four clicks away-every Microsoft product will be sold at a loss."

He believes that buyers will simply click to each of the four stores--Beyond.com, CDW, CompUSA, and Insight--then pick the lowest price.

"And if you're not on the site, you don't even get to play. No reseller wins on that," Tartar added. He figures the participating stores must count on visitors sent over from Shop.Microsoft buying something else than the Microsoft loss leaders.

Egghead.com is one online reseller that decided not to play on this project, but last week it signed on as the premiere software reseller for another Microsoft entity, MSN Shopping.

"It's a matter of allocating marketing dollars across a very broad horizon," Egghead.com spokesman John Hough. "Microsoft is an important part, but not the only part. We are very comfortable with the choice we made."

After encountering particularly rough reseller reaction last summer, Microsoft shelved the program temporarily to rethink it. At the time it was considering outsourcing the operation to TechWave, whose CEO, Dwayne Walker, is an ex-Microsoftie. TechWave is not participating in the initial group, but Microsoft said other resellers will be added.

Microsoft did alter the program then, scrapping a plan to let resellers bid for places in the program. Gone too are the fees Microsoft had intended to charge for every referral. A requirement that the reseller's store must run exclusively on Microsoft technology was ended as well--now the reseller needs only a translation box to accept orders from the Microsoft site and put them into the reseller's existing system.

But Microsoft does require resellers in its program to offer every one of its 600 software, hardware, and Microsoft Press products, a difficult requirement for smaller stores.

Although the Nitro project, targeted to consumers, has drawn most of the fire from resellers, Microsoft earlier this month opened another store designed for small and mid-sized companies to get multiple-user licenses for Microsoft software. CDW and Insight, which are in the consumer store, also signed up for the small-business licensing operation.

"Microsoft wants to be where customers are going," said Schneider, who's overseeing the software store. The recent boom in consumers buying online has underscored that strategy, but Microsoft has had the project in the works for years. In addition, Microsoft's broad Web presence draws 2 million visitors a day, and the company wants to take advantage of that traffic. It also hopes to showcase its e-commerce technology on the store.

But analyst Tartar says software publishers are growing frustrated with retailers in the physical world.

"I've had five conversations in the past week with major software companies that are getting very frustrated with the retail channel in terms of its ability to generate growth," Tartar said. He thinks online sales and the entry of large wholesalers like Costco, into software sales are crimping the retail channel's growth.

"The traditional channel is in deep trouble, and reasonably smart companies have figured that out," he said. If he's right, other software publishers may join Microsoft in expanding their online sales operations.