What Exchange hosting companies have to do to differentiate their product from Microsoft Exchange Online

Despite the recent hype around the launch of Office 365, Microsoft did not invent hosted Exchange. In fact, well before Microsoft got into the hosting business, other companies around the world were using versions as old as Exchange 5.5 to deliver a hosted email service for customers. Of course, in this era Microsoft didn’t do any engineering or make any other attempt within the product to help the hosting companies figure out how to deploy, manage, or evolve a shared messaging service and it was left to the hosting companies to work out solutions to many technical challenges, such as how to provision mailboxes, billing and reconciliation, SLA management, and so on.

The world has now changed and Office 365 is a huge presence in the hosted Exchange market. To their credit, Microsoft has done a lot of heavy lifting in the engineering of Exchange 2007 and Exchange 2010 to make life easier for hosting companies (some would say that the advent of PowerShell support in Exchange 2007 was the single biggest advance). I also think that the Exchange development group has been pretty open with hosting companies as to what options exist – a look at Michael van Dijken’s August 8 post on Ian Hameroff’s blog gives some insight as to the messages that are flowing. This post follows a session at the recent Microsoft Worldwide Partner Conference so you can take it that Microsoft is setting its stall out pretty well.

However, nice as it is to open lines of communication, the downside that hosting companies now face is that they have to sell their services against the Microsoft marketing machine. In addition, Microsoft’s partner community is rapidly gearing up to sell Office 365 seats on a commission basis, further adding to the pressure within the marketplace. The question therefore for hosting companies is what should they do to prosper and grow their business in the new world of Office 365 where Microsoft sets the baseline expectation for customers in terms of the monthly cost of a mailbox as well as the functionality (such as a 25GB mailbox) that customers can now expect.

A recent blog post from the Exchange team threw more fuel onto the fire by essentially saying that Exchange 2010 SP2 is a perfectly valid option for hosting companies to use. The question therefore arises as to what future exists for Exchange 2010 Hosting Mode, released by Microsoft last year to enable hosting companies to run multi-tenant Exchange 2010 deployments. The post describes an automation framework that Microsoft will publish when they release Exchange 2010 SP2 and recommends that any customer who is considering a hosted provider should ensure that their provisioning and other tools have been validated by Microsoft against their framework. On the surface, validating that tools work against a standard seems to be a good idea and certainly Microsoft has done a good job checking out load balancers that work against Exchange. The conspiracy theorists will see things differently and say that imposing a framework just creates another hurdle for hosting providers to jump before they can sell email based on Exchange 2010. I guess we'll just have to wait and see what are the details of the framework when it is released by Microsoft. 

Given all that's been going on, pessimists will conclude that it is pointless to fight against the Office 365 tsunami. If you take this view, you’d be looking for the most cost-effective way to exit the Exchange hosting business because you think that your customers will probably all move to Office 365. In this scenario, you’ll sweat your existing hosting assets and attempt to restrict costs as much as possible. You’ll probably transform your business into something like an Office 365 reseller so that you can earn commission from Microsoft as customers move to Office 365 and you’ll consider how to make more money from pure services such as those that customers will need during the migration.

Optimists take a different view and will look at Office 365 for weaknesses that can be exploited. One obvious weakness is the “all-in” nature of Office 365. In other words, customers who sign up for Office 365 cannot expect to receive a huge amount of personalized service nor can they expect to be able to customize the environment to meet specific needs. Sure, enterprise customers will likely have dedicated Technical Account Managers and account consultants assigned by Microsoft to work with them, but these folks might not have a huge amount of Office 365 expertise and are possibly more focused on growing Microsoft’s share of wallet in other areas of the business once the Office 365 deal is concluded.

I do think that third-party hosting companies can build a complimentary, differentiated business around Exchange 2010 that provides an extra level of service and capability to Office 365. The TechNet feature comparison between on-premises Exchange 2010 SP1 and Office 365 gives some ideas about how a tailored service can gain advantages by including features that are not yet or will never be supported by Office 365. For example, customers who depend on public folders because they have build applications around them are at a complete and utter loss when it comes to Office 365.

Creating and selling a more personalized and tailored Exchange service to customers will take a lot of hard work but at the end of the day customer relationships are where business is won and lost and the hosting companies have a long track record of successful delivery to their customers that provides them with an initial advantage. If they can get ahead of Office 365 and prove to customers that they can deliver a higher level of service across the spectrum of design, deployment, delivery, support, and cost then success is more than feasible. For instance, demonstrating how they handle outages and provide a personalized service to help customers get back online as quickly as possible seems like something that could become a competitive advantage following the recent BPOS and Office 365 outages.

You might think that hosting companies might not be able to compete with Microsoft on cost and the monthly charge per mailbox might be higher than Office 365. However, a quick scan of the prices published online proves that this feeling is not necessarily correct as the headline prices in the U.S. vary from $5.95/month upwards. Of course, there's always the detail in the contract to work out before you can be sure that you are comparing apples to apples between the offerings from two hosting providers. For example, you might not like to take out a contract that binds you for three years. The same care is necessary with Office 365 to navigate the array of plans available from Microsoft in order to select the most appropriate option for your company. It's also fair to observe that Microsoft's price for an Office 365 subscription includes both SharePoint Online and Lync Online, so you need to factor in the potential added value that a company might gain from using these products when you make a comparison.

However, even with all the trump cards that Microsoft appears to possess, I believe that people are prepared to pay for higher quality and individual support and that the cost per mailbox per month is not the sole driving factor when it comes to making a decision about what company to use. Why else do you think people sign up for Platinum credit cards when the purported benefits might not be measurable in financial terms?

Another potential plus point for hosting providers is the continued engineering that Microsoft pours into Exchange. Some of the work is dedicated to Office 365 and will only run inside Microsoft’s datacenters but other functionality will find its way into the version of the product that’s available to all. Address Book Policies is a new feature in Exchange 2010 SP2 that’s a good example of something that probably won’t be of much interest to the general-purpose Exchange customer but is very valuable to a hosting company that wants to be able to run a single Exchange organization to serve multiple small customers. I expect more features like this to appear over the years simply because Microsoft must continue to transform Exchange from a product whose history is firmly rooted in classic corporate IT infrastructures into something that is equally at home in dedicated and shared datacenters.

The bottom line is that while Microsoft has set new expectations for how much people need to pay monthly for a 25GB mailbox running on Exchange 2010 , there's still lots of opportunity for other hosting providers to compete and win against Office 365. So come on Intermedia, USA.Net, Cobweb, AppRiver, Apps4Rent, SherWeb, Verio, and all the other companies that have built hosting businesses around Exchange over the last ten years. Don't give up the good fight and show that personalized support and attention for customers allied to innovation in service delivery can retain your competitive edge. Competition is always good in any market and I look forward to lots of competition for Office 365 in the coming years.