Microsoft Office 365 And Cloud Revenues: Adjusting My Views

Can partners profit from Microsoft Office 365 cloud services? I’ve been asking that question ever since Microsoft (symbol: MSFT) launched Office 365 in June 2011. Fast forward to the present and I’m finally adjusting my views on Office 365 and recurring cloud revenues.

As you may recall, partners that resell Office 365 earn 12 percent of revenues plus 6 percent on renewals. That’s 18 percent margin in year-one and 6 percent in future years. And therein resides the challenge: Some partners say those margins are too low — especially when Office 365 starts at $6 per user per month. On the flip side, Microsoft has stated — ever since Office 365’s launch — that the real partner revenue opportunity involves consulting services.

Waking Up to Reality

It took me nearly a year, but I’m starting to side with Microsoft on this debate. And ironically, my opinions are being shaped by Google Apps Authorized Resellers.

Let me explain: In the Google Apps world, resellers earn about $10 per user per year. That ain’t much. Yet plenty of Google Apps Resellers seem to be gaining critical mass. One example: Cloud Sherpas, a top Google Apps Authorized Reseller, is merging with GlobalOne, a top Salesforce.com channel partner.

During a conversation last week, Cloud Sherpas described a range of consulting opportunities to me. I don’t recall hearing the “recurring revenue” term once during the conversation. Instead, Cloud Sherpas waxed poetic about its cloud consulting practice, which also includes some custom code development and end-customer training.

Jeff Ragusa, an SMB channel lead at Google, has often told me that the best Google Apps partners us Google Apps Script to integrate multiple applications together — for a lucrative fee.

The Office 365 Neighborhood

Now, let’s apply my example Google Apps example to the Microsoft Office 365 channel partner community.

Can we all agree: There isn’t much initial profit opportunity in the recurring revenue model — unless you’re deploying hundreds of thousands of Office 365 seats. Few SMB partners fit that profile. But as Microsoft continues to enhance various applications (Lync and SharePoint, in particular) in the cloud, there will be more and more opportunity for channel partners to add custom integrations onto those platforms.

A decade ago, resellers were forced to wrap consulting and support services around hardware. Today, resellers need to wrap consulting, integration and support services around SaaS applications. It ain’t easy. The business model is in its infancy.

But VARs and MSPs need to adjust their mindsets. With Office 365, the profits will involve migration services — at least until the Office 365 cloud supports partner customizations. Consulting and migration services will be the meat and potatoes of the market. Recurring revenues is the gravy. Just remember: You can’t live on gravy alone.