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.
The question looms: How will Microsoft avoid stepping on the partners who blazed the hosted Exchange trail?
Microsoft is offering a suite, including hosted versions of Exchange, SharePoint, Office Communications and Office Live Meeting, for $15 per user per month.
Existing Exchange users can get discounts, as can large users, ranging from 4% off list for 1,000 users to a maximum 24% for 50,000 or more users, according to Microsoft's online cost calculator.
Once just targeting enterprises, Betz said Exchange Online will now be aimed at businesses with as few as five users, which Microsoft had previously said it would avoid.
Microsoft hopes to keep partners happy through sales incentives and promised upselling opportunities.
"Ninety-six percent of our sales are through partners. We expect that to continue, even if the service is provided via Microsoft's data centers, as partners have the opportunity to surround it with professional services of their own," said Betz. He predicts Microsoft will double the number of partner resellers to 3,000 within a year.
Keeping Notes at bay
Microsoft also hopes that the lower upfront costs and hassle of switching to Exchange Online and SharePoint Online will help it continue to pull users away from Notes.
Among Exchange Online's launch customers are Ingersoll-Rand, which switched 20,000 employees from Notes, and Eddie Bauer, which switched 1,400 employees from Notes.
That may not be easy. Despite Microsoft's rhetoric, migrations from Notes to Exchange have slowed, said Ferris.
"Every Notes user says their strategic direction is to migrate to Microsoft, but as a practical matter, those who could have easily done it would have already done it," Ferris said. "Migrating is too much hassle, the porting costs are too great."
Another obstacle is a re-invigorated IBM.
IBM's Lotus has "got all sorts of stuff that Microsoft can't yet do. SameTime is by far the leader in real-time instant messaging," Ferris said.
IBM also has a new content sharing app Quickr to counter SharePoint. And it has introduced the nearly free Symphony productivity suite to round out its collaboration stack.
And there are limitations in Exchange Online. Mailboxes default to just 1GB. Every additional gigabyte costs $2 per gigabyte per month. The maximum size is 4GB, despite the service being built with Exchange 2007, which supports mailboxes up to 16GB.
The 4GB limit is "to ensure the best performance in Outlook," said Betz. "Customers we talk to tell us that overly large in-boxes create many problems for their organizations," which have to comply with rules around compliance and e-mail discovery.
Betz suggested that customers with large e-mail accounts should move them to Exchange Hosted Archive or store large attachments on SharePoint Online.
Exchange light
Exchange Online also won't have all of Exchange's features. For instance, Public Folders, which was originally developed to host Notes folders content and smooth the migration to Exchange for companies, is not present, said Betz.
"We think that direction is best served by features in SharePoint Online," he said.
However, most features made available in new releases of Exchange or SharePoint will be available in the Online versions "within weeks," he said.
As Exchange hits middle age for software and the market slowly turns away from it, other questions loom.
Despite some technical complaints and update snafus, Exchange 2007 appears to be selling well.
But Microsoft has said nothing about Service Pack 2 of Exchange 2007, much less the next version of Exchange, code-named for now Exchange 14.
"I expect a new version around the time Office 14 ships, sometime around mid-2009 or later," said Alliegro. "Microsoft is pretty tight-lipped about features, but it wouldn't surprise me to see more focus on voice integration and other real-time communication features, probably in concert with [Office] Communications Server. I'd also expect the usual emphasis on basic blocking and tackling -- better security, spam filtering, etc."
Product development will be led by a new executive, corporate vice president Rajesh Jha. He took over for Terry Myerson, who built Exchange 2003 and 2007, and is taking over the reportedly troubled development of the Windows Mobile smart phone operating system.
In a blog posting last week, Jha said he plans no major strategic changes for Exchange.
Tea leaf readers will view that as implicit confirmation of predictions by Gartner Inc. analyst Matt Cain and others that Microsoft will still use the Jet storage engine in Exchange 14.
Jet is the reason for a hard 16GB cap on e-mail account sizes in Exchange 2007.
Cain predicts that Microsoft will switch to the more-scalable SQL Server for the subsequent version of Exchange, due about 2012.