It's going to be hard for Microsoft to move forward with its plans for the world of Web-based software, an integrated package of products and services dubbed Next-Generation Windows Services, with all those court-ordered business restraints and the threat of dismemberment hanging over the company.

But Microsoft isn't sitting still, pursuing instead an ad hoc strategy of investment and partnership to get its products into the application service provider (ASP) marketplace.

Take the company's early-June announcement that the application-hosting unit of Cable & Wireless (www.cwplc.com) will make its Exchange and Office products available via the Web to small businesses. More important, Cable & Wireless will base its services on Windows 2000 server software, the linchpin of Microsoft's ASP effort. "Moving forward, Microsoft's overall strategy will continue to be focused on advancing the Windows platform as the premiere platform for the applications hosting market," says Thomas Koll, vice president at Microsoft's Network Solutions Group. "We will continue to work closely with the right partners and ISVs [independent software vendors] to ensure that the core technology needed to enable software as a service is in place."

Microsoft (www. microsoft.com) has been cozying up to telecoms since it first allied itself with Qwest Communications International (www.qwest.net) in December 1998 and put big bucks into AT&T (www.att.com) last year. It didn't put any money into the Cable & Wireless deal, but so far this year it has invested more than $120 million in about a half-dozen hosting plays, including a $10 million stake in ASP Corio (www.corio.com). That's chump change for cash-rich Microsoft, but real money to small companies, and it keeps Windows 2000 in the game.

"It adds up to a strategy to secure key aspects of the emerging channels in the hosting environment," says Rob Enderle an analyst at Giga Information Group (www.gigaweb.com). "They're being flexible, depending on what's needed in terms of technology or investment, or both."

Says Jonathan Usher, a group manager at Microsoft's Network Solutions Group, "We're working as a technology provider to companies like Qwest, British Telecom, Cable & Wireless, and others, as they build out their platforms. But we're also a business partner that will work collaboratively with service providers to help them enter the market. That could mean investing in them, or providing resources to help with deployment. That's the well-defined strategy behind the Cable & Wireless announcement."

The fear that ASPs will build primarily on Linux and other Unix variants is a real one for Microsoft, which counts on its operating system to sell its applications. That's one area in which a break-up could do Microsoft some good, Enderle says, at least on the applications side. "Now you can't sell one without the other," he says. "An applications company could develop products independently."

A natural fit

Stuart Keeping, vice president of marketing at Cable & Wireless Application Services, says Microsoft's products were a natural fit for the small- and midsized-business customers his company is targeting. Cable & Wireless has announced plans to build at least 20 data centers around the world in the next three years, inking a $500 million deal with Compaq Computer (www.compaq.com) in November 1999 as part of the program. "The global alliance that we have struck with Microsoft guarantees that, with Compaq, we can offer unrivaled, end-to-end service," Keeping says. "With the data and hosting centers as an integral part of our global IP [Internet Protocol] network, we offer a whole range of networkcentric services."

So far, hosted operations are not providing a substantial revenue stream for the company, says Usher, who has been in Microsoft's services group for four years. "It's very early days for us in terms of revenue, it's embryonic, and the headlines eclipse the reality," he says. "Looking out a few years, it has the potential to be a very significant revenue stream. I expect it to be transformative for the industry."

The company has not settled on a payment model for its hosted software, and is currently studying rental and licensing plans for products, including the messaging applications that seem likely to be in highest demand in the short term.

But there's no guarantee that Microsoft will succeed in establishing Windows 2000 as a hosting platform. Its task would be tough enough without its legal problems, and could be overwhelmingly difficult with them. "NGWS [Next-Generation Windows Services] is virtually impossible in this climate," Enderle says. "Any tying-together of products will be in violation of the court's remedies. There would be judgments rendered in real-time on everything they did."