The emergence of independent software as a service (SaaS) providers has created a major competitive challenge for most of the established independent software vendors (ISV). The Wall Street Journal (WSJ) released a series of excerpts from a Microsoft internal memo, where Chairman Bill Gates warned his top executives of the SaaS threat. In these excerpts, Gates called on Microsoft to jump toward the trend of SaaS over the Internet. Some are comparing the memo to his call in the 1990s for Microsoft to embrace the Internet and in the early 2000s to embrace Web services. These calls led to the ubiquitous Microsoft Internet Explorer (IE) browser and Microsoft Service Network (MSN) on-line services, and Microsoft's .NET framework, respectively. Gates also demonstrated a type of “SaaS clairvoyance” in 1998, when he sent a fourteen page internal memo outlining a future, which included what he called a MegaServer, a gigantic server connected to the Internet that would allow on-demand delivery of any type of information to a user from any computer, television set-top box, palm-size personal computer (PC), or other device. A revealing e-mail from Microsoft’s chief technical officer, Ray Ozzie, is also about software services, and is especially relevant in light of Bill Gates’ memos (http://www.scripting.com/disruption/ozzie/TheInternetServicesDisruptio.htm).

This is Part Three of the four-part Software as Service Is Gaining Ground series.

Now Microsoft includes everything in its SaaS vision, from add-ons to future versions of Microsoft Office, to hosted Microsoft Exchange, to next-generation MSN services. Still, Microsoft’s most recent unveiling of Microsoft Windows Live and Office Live ironically did not have much to do with offering Windows or Office as services, and consequently was received merely as a re-branding of MSN consumer services that are already available or under development. In addition to using the Microsoft SharePoint portal technology to support Office Live, Microsoft might tout its experience running enterprise-class services, including Office Live Meeting for Web conferencing and FrontBridge, a managed service focused around e-mail cleanliness. But because those services were obtained through acquisitions, the behemoth cannot point to native expertise in developing enterprise services.

In early 2006, Microsoft plans to release business services linked to internal deployments of Office, targeted at companies with ten or fewer employees. But, it is still unclear how it plans to turn its enterprise-class software into corporate services or how it will offer hosted services for its current collection of Windows Server System and Office System products. At least, the giant has indicated its intentions to bring Microsoft Dynamics CRM (formerly Microsoft CRM) and other business applications into the services fold to combat companies such as Salesforce.com, RightNow, NetSuite, and Salesnet.

However, many other larger vendors initially dismissed SaaS, application service providers (ASP), and other hosted arrangements as lightweight and unsuitable to enterprise-class customers. But they are gradually “reversing course”. For instance, Siebel (soon to be part of Oracle) has already offered Siebel CRM OnDemand, which should come in handy for Oracle in terms of its hybrid on-premise/on-demand offering. Additionally, SAP has taken notice of vendors, like Salesforce.com, that are making notable headway in the SaaS market.