HostingCon2007: Microsoft Maps Out its Hosting Strategy

On July 24th Microsoft announced its comprehensive strategy for enabling hosting providers to be successful in the world of software plus services. The strategy proposed by Microsoft includes providing the next-generation hosting platform, delivering applications ready for hosting, and driving growth through tight integration with Microsoft’s extensive partner ecosystem.

Competitive Positives

► As demand for applications delivered using a subscription-based model increases, Microsoft recognizes that it needs to begin to go beyond a more traditional licensed software model to exploiting the SAAS model as a major sales channel.

► Leveraging its extensive distribution network, Microsoft is offering its partners the ability to connect with each other to build new revenue sharing models to drive their own growth and further Microsoft’s market penetration.

► The forthcoming Windows Server due early next year will incorporate IIS 7, which promises to allow PHP scripts to run seamlessly on a Windows platform.

► Microsoft is providing a suite of tools such as Silverlight, the company’s graphics presentation framework, which partners can use to improve the end user experience dramatically and drive more demand for hosted application services.

► The Software + Services announcement refocuses attention on Microsoft’s existing licensing options for hosting providers, which include a service provider license agreement that allows hosting providers to purchase software licenses using a subscription model, in which they report their usage on a monthly basis rather than having to sign an inflexible three-year contract. This in turn allows them to be more flexible and operate in a more cost-effective manner.

Competitive Concerns

► While Microsoft’s Software + Services strategy looks good on paper, some key elements such as the forthcoming Windows Server and the associated IIS 7 are still in beta and won’t be commercially available until next year. Whether the technology is as easy to use, as fully functioning and as stable as customers need remains to be seen.

► Though Microsoft’s long term success is closely linked to how well hosting providers using its hosting platform and applications fare in the market, the company still maintains some hosted Microsoft CRM and Microsoft Exchange offers of its own. This begs questions about the company’s plans for future development of these offerings, and how much of a threat the company might be to its own partners.

► Free software – available without multi-year contracts or monthly license fees – has commoditized dynamic server functions. Microsoft's products best succeed when customers must have Microsoft-specific applications, such as Microsoft Exchange or Microsoft CRM. For dynamic web site applications that do not need specific software, LAMP (i.e., Linux, Apache, MySQL and PHP) is an alternative with a price tag and flexibility that's hard to beat by WISA (i.e., Microsoft Windows, IIS, SQL Server and ASP).

| Client Access - Internet/Managed Services - U.S. |

XO Bumps up Capacity and Broadens Network Services Campaign

On July 30th XO Communications announced the deployment of additional capacity on major routes across its nationwide fiber optic network, and the extension of availability of its 3 Guarantee program to include additional services. XO completed an upgrade to its nationwide network in October 2006, delivering 100 Gbps capacity to 75 major U.S. metropolitan markets, and the carrier is increasing capacity to 800 Gbps between certain city pairs. Along with the network upgrade, XO has extended its 3 Guarantee program to add 1 Gbps and 10 Gbps Ethernet services to its Best Price Guarantee, and has added a one month service credit for Ethernet Services and IP Transit to its Install Guarantee. Previously, Best Price and Install guarantees applied only to wavelength services.

Recommended Competitive Responses

► All competitors should position XO's filling up its fiber to support a full 800 Gbps potential as the carrier having cut a deal to ship a massive amount of line cards from its supplier, which has nothing to do with providing actual services. They can reference a belief that XO is reprising the “build it and they will come” approach of CLECs in the 1990s: The customers never showed up, and CLECs went out of business with their massive amount of infrastructure that was bought and virtually unused, effectively worthless.

► XO’s network enhancements and network service guarantees affect Level 3 more than other providers since XO’s network parallels much of Level 3’s network. Level 3 has also embarked on a network upgrade with Infinera’s optical transport equipment, and the carrier plans capacity upgrades. Level 3 can position itself as an established provider with an extensive U.S. metropolitan presence and long-haul network that can provide quality services domestically and internationally at competitive prices.

► Level 3, Global Crossing, AT&T and Verizon can all emphasize their direct international reach. While XO may be adding capacity domestically, the carrier cannot match the U.S. metropolitan reach and international presence that these competing carriers offer.

| Client Access - Business Network Services - U.S. |

Sprint and Clearwire Team for WiMAX Rollout

On July 19th Sprint Nextel and Clearwire signed a letter of intent to pool their efforts in constructing the first nationwide mobile WiMAX network, and to operate as service partners. As a result, each company anticipates greater capital efficiency and lower network development and operating costs. The carriers plan to exchange spectrum to optimize their markets. Each will build out its markets for the nationwide network, and enable roaming between markets. Both carriers will share in product and service evolution, employ each other's infrastructure, and share branding, marketing, and distribution channels for the WiMAX network and services.

Recommended Competitive Responses

► If Sprint Nextel’s (and now Clearwire) WiMAX plans didn't have the attention of wireline incumbent local carriers before, those wireline carriers need to start paying attention now. In terms of messaging to business customers, the simple competitive response to queries about WiMAX is that the technology is still young and unproven, and while there has been plenty of noise, a nationwide network has yet to be built out.

► Providers of broadband wireline business services can describe WiMAX technology as being obsolete before it is even rolled out. They can compare the competing technology's 2-4 Mbps bandwidth against current generations of DSL offering up to 6 Mbps; cable, Verizon FiOS, and ADSL2+ technologies all are capable of offering much higher speeds. Against leased lines, they can describe WiMAX as having yet to prove it can provide any meaningful service guarantees.

► Providers of leased line wireline services can say that WiMAX is unsuitable for business. They can say that when it comes to wireless technologies, anything other than professionally installed point-to-point microwave has failed to offer meaningful service guarantees, and WiMAX will have the same fate because no one can provide guarantees against the unknowns that can happen in the access network.

► Competitive wireless operators (AT&T, Verizon Wireless and T-Mobile) need to make sure their own 4G strategies and upgrade plans are in place, perhaps sooner than they would have otherwise wanted, to meet or beat Sprint and Clearwire’s competitive threat. With planned WiMAX services to be deployed nationally in 2008, there already needs to be competitive plans for significant coverage with the next generation of cellular services, especially if Sprint can use the inherent cost-efficiencies of WiMAX to offer much faster, less expensive mobile access.

Recommended End User/Customer Responses

► Sprint Nextel intends to turn on its initial WiMAX markets — among them Chicago, IL; Baltimore, MD; and Washington, D.C. — in late 2007 or early 2008. Since Sprint Nextel and Clearwire do not yet have their new WiMAX deployment plans up and running, and they have not yet announced whether business-class services will be available at launch or at a later date, customers cannot take any action based on the carrier partnership at this time.

Client Access:
| Business Network Services - U.S. | Wholesale Telecom Services |