So, it turns out I wasn’t the only one attending this conference for the first time last week. Channel Partners is in its 19th year, and it seems strange that this was the first time for Microsoft as well. No doubt the show producer was happy having them in the fold, and there are some interesting storylines to consider here. Historically, partnerships with Microsoft have tended to be one-sided, so when the main take away from my discussions with them was “we’re partner-friendly”, you’d be right to do a double-take.

Before Skype for Business there was Lync, and while this is a solid UC platform, it was not ideal for voice. This created some challenges for the channel, especially monetizing an offering that didn’t have any hardware attached to it. The latest iteration of SFB has PSTN connectivity, and that makes for a more complete offering, and hence Microsoft is now at Channel Partners.

A lot has changed in the last year or so, and two things being particularly relevant to Microsoft. First is the mass migration underway for everything into the cloud, and second is their focus now to make telephony an integral part of the SFB value proposition.

To better understand what these changes mean and why it’s important for Microsoft be at Channel Partners, I spoke with Microsoft’s Justin Slagle, Partner Sales Executive for SMB. I also sat in on an Office 365 presentation by Microsoft’s Sherman Crancer. Most of what I learned can be distilled into two basic themes, posed below as questions.

Why go to the cloud?

We all understand the basic drivers for this, and the stars are lining up nicely now for UCaaS. However, Microsoft in particular has a sense of urgency here as their legacy software licensing model is being challenged like never before. They don’t have the market power they used to, and competitive forces are pushing them to accelerate a shift to Office 365.

To date, Justin explained that 14% of Office users have migrated to the cloud, so there’s a large runway ahead of them to retain customers, at least among those who have decided – or been persuaded – they need to do this. The jury is still out on whether that’s 100% of the market or a growing majority, but clearly this is a major priority for Microsoft. Their expectation is to have 50% of Office users converted to Office 365 by 2020, and this is a big reason why they need channel engagement – they won’t get there without help. Not just any type of partner, mind you, and I’ll get to that shortly.

The SMB market in particular is key to this plan. Within Microsoft, it’s the fastest growing LOB, up 23% last year, and expected to grow by 30% this year. Not only is the momentum strong here to drive overall growth, but SMBs are an ideal customer base for SFB. Cloud-based solutions allow SMBs to scale and compete with enterprises in terms of having the same capabilities, plus the PSTN piece of SFB gives them an attractive option to reduce telephony costs.

Another driver for the cloud is the impact on revenues. Justin explained how premise-based software renewals generally run on 5-6 year cycles, so the impact can be difficult to predict, especially with so much business moving to the cloud. The hosted model, of course, is Opex-based with renewals occurring on a monthly basis. This may make for more incremental revenue streams, but it’s more predictable, both for Microsoft and the channels.

There’s another reason why Microsoft is embracing the cloud, and it’s much bigger than SFB. Piracy is endemic across the entire software industry, but perhaps none more so than Microsoft. I don’t know the financial implications, but what’s important here is how the cloud can mitigate or even eliminate those losses. Once pirated software is in the open market, Microsoft has no way to shut it down, but when it’s cloud-based, they can disable it once discovered. Aside from helping protect Microsoft’s revenue base, this also provides revenue assurance for the channel so that only authorized customers will have access to SFB.

Why work with the channel community?

As noted earlier, Microsoft is going to need help in achieving their objectives, which are actually two-fold. First, they need help – scale, really – to accelerate SFB adoption in a way that keeps them on track to hit that 50% conversion target for 2020. SFB is just one LOB within Microsoft, but given how quickly their SMB unit is growing, it has a big role to play in meeting their corporate objectives.

Secondly is the recent addition of PSTN calling to SFB. This is really a new line of business for Microsoft, and telephony has never been their strong suit. Figuring out how to make their $8.5 billion investment in Skype pay off is a topic for another time, but PSTN calling has a lot to do with that.

Aside from that, they simply need PSTN and a turnkey telephony solution to stay competitive. All the usual suspects have this in their cloud offerings, and it’s now coming from other directions. Cisco is betting heavily on Spark, and to build that out into a more complete collaboration solution, they’ve added PSTN. This space is moving very quickly, and Slack won’t be far behind for adding voice, and for that matter, so will the social media players who want into the business communications space, such as Facebook.

Not only does the cloud make it possible for anybody to sell anything, but that also puts pressure on the channel to choose their partners wisely. Microsoft is no longer the only game in town, and now they too must choose wisely in the marketplace of channel partners. Stepping into this crowded arena for the first time last week, it’s not a given that channels will be lining up to do business. As such, Microsoft is going in with an open mind rather than setting the tone from the outset.

My sense is they really don’t know what to expect, so being at Channel Partners was very much a discovery expedition. This might be the friendliest opportunity the channel will ever get to work with them, so it will be interesting to see what pans out. I mentioned earlier about finding the right types of partners. Both Justin and Sheldon cited a stat to the effect that the average partner is only selling 2.6 deals a year. That turnover rate isn’t high enough to help Microsoft hit their cloud conversion targets, so they’ll need to be selective in finding partners who can bring them either more deals or bigger deals.

To be successful, Microsoft also needs to do some educating and evangelizing, since SFB with PSTN will be a new concept for channels. It remains to be seen how interested channels will be in selling this, and if the terms and margins are competitive enough with they can get from the likes of 8×8, Vonage and Nextiva, all of whom I have featured in my blog coverage from the conference. Even here, Microsoft appears to be entering this space with an open mind, as I’m told they would even consider partnering with these players if agents wanted to bundle complementary pieces, such as hosted UC or contact center along with Office 365. Microsoft won’t get all their deals to take PSTN, but nobody said this was an easy business.

Bottom line is that Microsoft is going into this with realistic expectations – they know they can’t win by telling channels what to sell, especially showing up for the first time when the market is being heavily disrupted. It’s a fresh approach for anyone wary of Microsoft’s clout, and if you recall their earlier SMB foray with Response Point, I’m sure channels will view this as a welcome change that’s in-step with the times.