Microsoft’s $200 million burden

Being a partner-led company, Microsoft has learnt that it needs to be careful how it treads as it moves to its cloud-focused model.

Gavriella Schuster, Microsoft Gavriella Schuster, Microsoft

Being a partner-led company, Microsoft has learnt that it needs to be careful how it treads as it moves to its cloud-focused model.

There’s a well-worn phrase about companies that use their own products internally, that they ‘eat their own dogfood’. And, for a company like Microsoft, it’s been sharing its bowl of chow with its community of partners for a long time. As they ate together, they all seemed content; well, as content as the relationships between a vendor and its partner community can ever be.

That is, until a Microsoft blog post appeared on July 1, giving gold and silver partners a year’s notice period before internal usage rights (IUR) were revoked for its software. The full bowl of ingredients, which many partners had been using to run their own businesses, was being cut down to only those that were used for the purposes of development and testing, internal training and business development.

And, boy, did the Microsoft partners howl, bark and gnash their teeth. So upset was the community at the withdrawal of these usage rights, and some support services, that a petition was signed by 6 000 partners.

Under previous top-level leadership, this might have been the end of the discussion. But, two weeks after the news broke, Microsoft held its partner conference, Inspire, in Las Vegas. According to the company’s channel chief Gavriella Schuster, whose keynote address opened the event, the response to the IUR announcement had been ‘overwhelmingly negative’. Adding that the company had underestimated the value that the IUR benefits had, and as its philosophy was based on ‘listening, learning and a growth mindset’, she revealed, to applause and whooping, the decision was being ‘walked back’. The big bowl of meaty chunks and kibbles was back for all to enjoy.

However, partner sentiment around the situation seems to have shifted from surprise and frustration to a sense of foreboding future echoes.

Speaking about the initial announcement, Mary-Jo Foley, long-time company watcher and editor of ZDNet's All About Microsoft, was surprised at how the vendor went public with this plan. “The Softies' love their studies and telemetry data. So it's surprising that they seemingly didn't do their homework first before conveying the bad news.”

Carel du Toit, CEO of the local Mint Group, was also surprised that the communication came out on a blog post, rather than a more formal channel, and a general lack of supporting information.

“It wasn't handled properly, and everyone jumped to conclusions,” he says.

Locally, he adds, there were a number of partners that were upset by the decision.

Ryan Jamieson, CTO at Altron Karabina, says that the decision would have had the most impact among startups. “When we started, we were reliant on those IURs to reduce the cost of operations, to enable us to begin building the business.”

This would have had a knock-on impact on the development of a new breed of partner operating in emerging technology frontiers that Microsoft is looking to encourage.

“As soon as you remove some of the benefits, it will stall a lot of the stimulation of the fledgling machine learning and AI companies that need the assistance. IUR has been valuable for partners over time,” Jamieson adds.

Lost in time

The original intention behind IUR has been lost over the years, says Foley.

“A lot of the problems with the IUR scenario were due to Microsoft basically looking the other way when partners used software and services to run their businesses – rather than to prepare for demos or learn the ins and outs of products  for sales purposes. Microsoft should have made it clear from the get-go.”

So were Schuster and her team simply redressing the company’s formerly slack approach to policing the adoption of the policy?

It seems not. Over time, there has been a significant change in Microsoft’s model. In the shift from product to services, IUR was previously concerned with the licensing of software, which had a capital cost for development amortised by widening sales. Microsoft products now largely reside in the cloud with additional, ongoing costs incurred, and those grow as the partner base expands. Schuster herself even confirmed, before the U-turn, that providing free IUR across the entire suite was no longer affordable.

“I heard from one contact,” says Foley, “that it's costing Microsoft $200 million a year, mostly because of compute and other cloud-backend costs (primarily for Office 365) to offer IUR.”

And so to the aforementioned sense of foreboding. While it seems the partners have won back the rights for the time being, this is probably not the end of the conversation. That cost will need to be covered somehow.

Contacting Microsoft locally and internationally for comment, The Margin was pointed in the direction of a post-reversal statement by Schuster, which reads: ‘Each year, we review how we engage with partners and evolve our approach to ensure we provide best-in-class support to you and stay ahead of market changes. As we move forward, we commit to providing even more advance notice and consultation with our partner community to mitigate concerns and address issues up front.’

The sentiment to be taken from that is the situation will probably be picked up again next year, with a better strategy and communication.

“I expect them to somehow try to tighten up IUR costs, though maybe in a more gradual way, at some point in the relatively near future,” says Foley.

Du Toit agrees. “It's inevitable if you look at how the model works. Microsoft is revamping the partner base because of the way it’s moving to cloud; the transaction-based partners become less strategic.

“The writing has been on the cards for five years. Microsoft has been saying the same thing repeatedly, telling partners to become industry-specific, solutions-specific, not to be transactional, because cloud becomes a direct model over time. Partners that didn't adopt might feel aggrieved, but, in my opinion, they should look at themselves.”

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