The path the Microsoft Channel takes is, contrary to its name, anything but direct.
In a recent interview on PartnerTalks, Jay McBain, a leading Channel analyst from Canalys with 30 years in the industry, waded into the Microsoft Channel, diving beneath its waters to examine its current state and bring its future to the surface.
Click the image below to watch the full PartnerTalks interview.
- AI’s Impact on Software: AI is expected to “eat” software, transforming traditional CRUD databases and SaaS applications into more dynamic, data-driven solutions. This shift will lead to a headless world where Copilots and agentic AI use data in real-time, enhancing efficiency and reducing the need for manual intervention.
- Data Management Challenges: With 83% of business data still on-premises, there is a significant challenge in making this data AI-ready. The transition to cloud-based data management solutions is crucial for leveraging AI’s full potential. Companies like Snowflake, Datadog, and Cloudera are essential in this transition, providing the necessary infrastructure and tools.
- Shift to Consumption-Based Models: The move from traditional licensing to consumption-based and micro-consumption models is reshaping the industry. This shift allows for more flexible and scalable solutions, aligning costs with actual usage. For example, Salesforce’s Agentforce charges $2 per conversation, while Zendesk charges $1 per resolution.
- Consolidation of Channel Partners: The consolidation of Channel Partners, such as the merger of SoftwareOne and Crayon, reflects the industry’s move towards more integrated and comprehensive service offerings. This trend is driven by the need to provide end-to-end solutions and enhance capabilities.
- Importance of Managed Services: Managed services are becoming increasingly important, offering predictable revenue streams and high customer value. The managed services market is expected to grow significantly, providing a stable and profitable business model for Channel Partners.
- Investment in Talent: Building a robust pipeline and investing in talent are crucial for staying competitive. Channel Partners need to focus on acquiring and retaining skilled professionals to meet the growing demand for AI and data-driven solutions.
The Evolution of the Channel
Jay explains that the Channel started to form in 1980 with IBM’s Microsoft partnership. The next two decades would lay the foundation for the Client-Server Era. This era, which began in 1999 with the rise of Salesforce, marked the advent of business applications and the growth of the Software as a Service (SaaS) industry.
The following 20 years, which Jay calls the Cloud Era, were led by AWS, Google, and Azure.
Now, Jay says the Channel is entering a new 20-year era driven by AI, initiated by the launch of ChatGPT in March 2023.
The Role of AI in the New Era
AI is poised to revolutionize the industry, much like software did in the past.
Microsoft, with its close ties to OpenAI, is at the forefront of this transformation.
The shift towards AI-driven solutions will likely – and, in many cases, already does – change how businesses operate by making processes more efficient and data-driven. However, many organizations, especially small and medium-sized businesses (SMBs) and mid-market companies, are struggling to keep up with the rate of technological advancement.
Challenges and Opportunities for Channel Partners
One of the key challenges SMBs and mid-market organizations face is data management.
Jay says 83 per cent of business data still resides on-premises, often on outdated mainframes.
Cleansing, indexing, moving all that data to the cloud and making it AI-ready are monumental tasks. Companies like Snowflake, Datadog, and Cloudera are emerging as crucial players in this transition process.
Jay also notes a shift from traditional licensing models to consumption-based and micro-consumption models driven by the need for more flexible and scalable solutions. Jay says he has heard from boards of directors that they want revenue strategies to align more closely with water and electricity utility companies.
For instance, Salesforce’s Agentforce charges $2 per conversation, while Zendesk charges $1 per resolution.
Jay says he expects this micro-consumption model to become more prevalent, impacting how Channel Partners price and deliver their services. Transactions, Jay says, will be facilitated through the Azure marketplace with lower fees (around 3%).
The Future of Channel Partnerships
The consolidation of Channel Partners is another trend to watch.
Microsoft has introduced a point system to recognize the contributions of its Partners. This system values not just sales but also activities like co-selling, co-marketing, and innovation. Partners who excel in these areas are celebrated and often become targets for acquisition by larger firms.
Major resellers like SoftwareOne and Crayon are merging, while others like CDW and Insight are acquiring specialized Partners to enhance their capabilities.
The traditional model of reselling Microsoft products is becoming less viable. Instead, resellers are focusing on the $8.45 multiplier effect, where every dollar of Microsoft revenue generates additional service revenue. This shift is leading to more emphasis on value-added services rather than just product reselling.
Companies that adapt to this new model and focus on the multiplier effect are being rewarded by the market. For instance, Insight’s acquisitions and strategic shift have led to significant stock market growth, outpacing even Microsoft.
The Impact of AI on Business Relationships
AI is not just about efficiency; it is also about transforming relationships. Jay explains that AI will change the way businesses interact with their customers, banks, governments, and other entities. The traditional top-down approach to data management is being replaced by a more integrated, data-driven approach. This shift will lead to a more seamless and efficient interaction between different systems and entities.
The Role of Managed Services
Managed services are becoming increasingly important in the Channel ecosystem. Jay emphasizes that managed services, which include CRM, ERP, marketing, and more, offer predictable revenue streams and are highly valued by customers. Jay expects the managed services market to grow to $610 billion in 2025, providing a stable and profitable business model for Channel Partners.
As we move into this new era of AI, Channel Partners must adapt to the changing landscape. By embracing new business models, investing in data management, and focusing on managed services, they can position themselves for success.
By referring to thought leaders like Jay McBain’s insights, we can develop a roadmap for navigating these changes and seizing the opportunities emerging from the waters of the Microsoft Channel.