Microsoft Exchange's challenges: Partners, the cloud, and (still) Lotus Notes

After 12 years of steady success, Microsoft Corp.'s Exchange entered a new era on Monday with Exchange Online's official debut.

Hosted in Microsoft's global network of data centers and sold directly by the software giant and 1,500 partners, Exchange Online is the most clear-cut example of Microsoft's Software+Services' strategy, which it hopes will help it gently steer its 200 million customers off-premise into the cloud while keeping interlopers such as Google's Gmail or a revitalized Lotus Notes at bay.

But Microsoft hasn't fully answered questions about how Exchange Online won't hurt its loyal army of partners, or how the service can overcome some of its limitations and aid the war against IBM's Lotus Notes.

"Microsoft may in fact succeed with Exchange Online," said analyst David Ferris of Ferris Research. "But they have aggressively rolled out similar offerings in the past that have failed."

Also, Microsoft has been mum about the next service pack for Exchange Server 2007, much less the next major release, code-named Exchange 14.

Exchange enters the scene

First released in 1996, Exchange was Microsoft's answer to IBM's then newly acquired Notes, right down its Version 4.0 that matched the more mature, market-leading Notes.

Notes' early shared documents and calendaring features put the "group" in groupware. But boosted by aggressive prices and Microsoft's integrated stack promises, Exchange pulled ahead of Notes within five years.

Today, Exchange is used by 65% of workers in developed economies, according to Ferris Research. Lotus Notes is used by 10% of workers.

"Exchange is a pretty healthy business for Microsoft, somewhere in the neighborhood of $2 billion a year in revenue," said Chris Alliegro, an analyst at the independent research firm Directions on Microsoft. "It's been growing in double digits year over year consistently, some of that by eating away at Notes, some of it by adding new features like unified messaging."

Though Lotus Notes has its strongholds, most notably among manufacturing and financial firms, Exchange has a near-monopoly among large telecom companies (90%) and health care providers (75%), said Ferris.

And despite the presence of Google's Gmail, Exchange still leads among small to midsize businesses.

"How many new businesses do you see buying e-mail servers? Almost none," said IDC analyst Mike Fauscette.

Most companies get Exchange through a hosting partner, including the 500,000 users of Exchange Online and SharePoint Online that Microsoft disclosed at the launch. Combining the companies it serves and those handles by partners, Microsoft has a total of 20 million hosted Exchange and SharePoint users, said John Betz, director of Microsoft's business online services group.

By 2011, a quarter of the expected 304 million Exchange e-mail boxes worldwide, or 76 million, will be hosted either by Microsoft or a service provider, said research firm The Radicati Group.