Over its 47-year history, Microsoft has long been known for employing subtle business practices to ice out competitors by preferencing its own products and services. The software giant is a master of bundling, using discounts on its vast array of products and services to keep consumers inside its ecosystem.
Over the years some of those practices have come under fire for being anticompetitive, and antitrust concerns have been a constant throughout its history. But an area that hasn’t received as much attention is Microsoft’s commercial marketplace strategy, exemplified by AppSource and Azure Marketplace, where third-party developers can build and sell applications across Dynamics 365, Microsoft 365, Power Platform, and Azure.
For Microsoft, the marketplace is a “necessary mechanism” to get the applications of independent software vendors in front of customers, said Anthony Joseph, vice president of Microsoft Cloud Marketplace & ISV Journey. Those applications are critical because they extend Microsoft’s capabilities where its current “products are insufficient to actually meet [the customer’s] business needs,” he added.
Partners also open the door to entirely new revenue streams as well. Microsoft’s enterprise software operation has historically focused on selling primarily to IT departments. But by building partnerships with independent software vendors, or ISVs, that sell primarily to security, supply chain, or sales departments, for example, Microsoft can expand its reach, said Casey McGee, Microsoft’s vice president of global ISV sales.
“What these ISVs get us is, frankly, much better depth by industry,” said McGee. “We will never rival the millions of man-years of work that has been done to build solutions by industry — we will never catch up to what these ISVs have built.”
To date, Microsoft’s commercial marketplaces have 15,000 sellers and 90,000 solution-partner sellers across 141 geographies. Last year, the cloud giant saw a massive 288% year-over-year increase in SaaS billed sales, according to the company.
But although Microsoft’s app store provides opportunities for thousands of ISVs, it also solidifies its market dominance. As more and more companies move their operations to infrastructure cloud services like Azure and SaaS products like Dynamics, Microsoft and other cloud platforms become the primary distribution channel for third-party companies that build products around those services.
In some instances Microsoft has used its marketplace to exert its power, by pushing ISVs to highlight Microsoft’s own software to receive better visibility among end-user customers, while making sure their apps don’t compete too directly with Microsoft’s own wares.
Microsoft continues to draw huge interest among app developers, in part because of the efforts it makes at growing its ecosystem and rewarding those who participate.
But in an era where upstart software vendors have a plethora of platforms to try to align with — as we noted in part one of the Inside the Enterprise App Store series — the tradeoffs that ISVs face when trying to tap into the vast customer bases of the industry’s biggest names are becoming trickier to navigate and raising questions about the real rewards for those efforts.
For ISVs that build add-ons to Microsoft’s products, the benefits of listing on Microsoft’s commercial marketplaces are complicated. While enterprise app stores enable third-party developers to monetize their products and reach new customers, rigorous listing requirements and mismatched incentives can make the experience tricky.
In order to list their application, ISVs need to pass a stringent set of security and compliance reviews. At first glance this makes sense, given that the third-party apps listed are often tightly integrated into the host company’s own suite of products. However, that data can also be used to weed out potentially competing tools, an example of how big vendors use their growing power to limit competition from smaller players.
“You have to ensure that your app is not in conflict with what Microsoft Teams does,” said Matthieu Giorgini, CEO of Waldo, a desk reservation app. “For example, if your app had a chat system within to talk with your support team, you have to remove this because it's in conflict with the chat feature of Microsoft Teams.”
AvePoint, a Microsoft partner that builds data management apps for Microsoft Teams, confirmed this review process, but didn’t say whether the company asked it to remove features.
“Certainly when you submit something they review whether this feature already exists in Teams or in SharePoint or Word, then that's part of the review process and consideration,” said Dux Raymond Sy, chief brand officer at AvePoint. But “it's no different than any other marketplaces for other ecosystems,” he said.
You have to ensure that your app is not in conflict with what Microsoft Teams does.
When asked directly, a Microsoft spokesperson denied the company asks partners to remove competing features. “This is not accurate. Microsoft has several partner solutions that compete in some way with the company’s first-party solutions,” the spokesperson told Protocol in an email.
But Microsoft still acknowledges that competition between first- and third-party apps is a concern.
“That's the balance that we strike on this all the time, right?” said Jake Swenson, Microsoft’s vice president and general manager of commercial marketplace. To Swenson, the best product should win, but that’s not necessarily a view shared broadly across the company.
“I guarantee you’d encounter plenty of people within Microsoft who might disagree with that, who might own the [profit and loss statement] for a certain one of our products that doesn't like the competitive dynamic that's there,” he said. “But the fact of the matter is, whether we facilitate it or not, competition is happening in the ecosystem. So we might as well be a part of making the experience better for customers and the economics better for partners to drive preference for our cloud.”
Although Microsoft may not explicitly force the hands of its partners to do its bidding, at times the company uses a variety of soft power methods to tip the scales in favor of its own products and services. For example, while Microsoft doesn’t require ISVs to pick a particular cloud, it provides discounts on products and services that could make it far easier to use Azure.
“We help them migrate from other clouds,” noted Microsoft’s Joseph, a benefit that could potentially make it cheaper for partners to use Microsoft Azure than competitors AWS or Google Cloud. Still, Microsoft claims to be playing nice. “If they're considering a multicloud approach, again, in this context of openness, we're excited by that and support them,” he said.
The statement is backed by some ISVs Protocol spoke with, several of whom have adopted a multicloud approach. “Whether we, in parallel with Azure, use some other clouds, we are not restricted in any way,” said Emil Sildos, chief revenue officer at FlashGrid, which facilitates the migration of Oracle databases to Azure.
Still, while apps listed in its marketplace could be developed on top of AWS or GCP, Microsoft wants partners to stay within the Microsoft ecosystem. “It could be AWS,” said AvePoint’s Raymond Sy. But “we’re a Microsoft partner, sitting in Google may not be as kosher.”
And Microsoft has other ways of pushing partners to use its cloud products.
Microsoft gives benefits to partners who help drive more usage of its products. For example, through its FastTrack program, the company provides customer referrals and leads to partners that help evangelize SharePoint, Teams, and Viva.
“FastTrack is more of an advisory services education program that's out there … where we provide advisory services, consulting, and workshops around things like adoption of SharePoint and Teams and the Viva modules,” said Christian Buckley, AvePoint’s brand alliance director.
Waldo’s Giorgini also claimed that lead generation and customer referrals primarily go to partners that are only using Microsoft services top to bottom. A Microsoft spokesperson told Protocol in an email that wasn’t true, and that the company also provides marketing and sales engagement to applications platformed on competitive clouds.
What’s clear is that Microsoft does provide substantially more go-to-market support to those partners who align themselves closely with the SaaS giant, which is not unusual in enterprise software.
For some of those partners, like Canonical, Microsoft account executives operate almost as an extension of the go-to-market team, helping large accounts with ISVs that could service their needs. But the ability to co-sell alongside Microsoft is limited to prominent ISVs such as Canonical, whose Ubuntu software makes up about two-thirds of all Linux virtual machines on cloud, according to Canonical.
Although these types of incentives aren’t necessarily uncommon and aren’t illegal, they highlight the contrast between Microsoft’s external messaging of openness and free market competition — especially as it tries to catch up to AWS’ sweeping lead in cloud infrastructure services — and the levers the company is pulling to tip the scales in favor of itself and the apps that are loyal to it.
Most Microsoft partners ultimately see the marketplaces as both necessary and beneficial. Several ISVs Protocol spoke with could cite no major challenges with Microsoft’s commercial marketplaces, and the vast majority were pleased with the partnership overall.
The partner benefits touted by Microsoft are also notable, as many of the partners Protocol spoke with have received measurable sales leads, marketing support, and increased revenue, along with training from one of the largest enterprise software companies in the world.
For many ISVs, the ability to transact via the marketplace, with access to existing cloud budgets, standard contract terms, and billing infrastructure, is also a key benefit.
“We utilize the marketplace first because that's actually easier,” said Alexander Gallagher, vice president of cloud for Canonical. “So think about it: If Azure is already set up as the chosen supplier, so you're already buying stuff from Microsoft, isn't it far easier just to add our software onto that bill, rather than to go off and set up separate contracting?”
That sentiment was echoed by several other ISVs, who also noted the convenience of having Microsoft handle billing and payments across different currencies and geographies. “We really prefer to do our transactions with the customers who use Azure Marketplace instead of establishing the direct billing relationship,” said FlashGrid’s Sildos.
But as more companies utilize cloud services, and more software spend gets consolidated through enterprise cloud app stores, the imbalance of power between the cloud giants and ISVs will grow. At any time Microsoft or others could shift the sands underneath partners: hiking up prices, removing their apps from the store, developing a competing product, or making it harder to receive benefits.
If Azure is already set up as the chosen supplier, so you're already buying stuff from Microsoft, isn't it far easier just to add our software onto that bill, rather than to go off and set up separate contracting?
For some ISVs, the potential of Microsoft developing competing products and services is a persistent threat. The fact that Microsoft could develop the very capabilities that Waldo offers is why Giorgini is happy flying under the radar.
“And now the idea is to grow fast so Microsoft doesn't do the same as us,” he said. The nature of his company’s dependence on the cloud giant may be precarious, but “this is the game of any ISV anyway,” Giorgini added.
Microsoft leaders of course downplay this threat, acknowledging that while there are “scenarios where we do bump into one another,” giving customers more choices is better for everyone in the end, said Microsoft’s McGee.
But once again, the challenge is, at any time Microsoft can shift the playing field.
For example, the company is making a series of changes to its partner program that, while providing additional benefits, will simultaneously make it harder for smaller ISVs. These changes may not impact large established partners with existing customer relationships, such as AvePoint or Canonical, but the same can’t be said for newer app partners, said AvePoint’s Buckley.
“I've been doing [partnerships] for a number of years and each year the rules change or the way they compensate or recognize a deal changes,” said Canonical’s Gallagher. “We haven't really experienced any friction or problem with that.”
Get busy selling, or …
But that ability to adapt isn’t as simple for ISVs with smaller footprints.
“Microsoft can sometimes be very picky with their requirements, and they keep changing every single year,” said Carina Faria, an employee at Connecting Software, which builds integration applications for Azure and AppSource. “Sometimes it’s for the better, but then it becomes harder on partners to act upon the changes and adapt to what they now consider to be the requirement.”
As Microsoft significantly raises the bar for hitting its different partner level designations, the company is also making it more difficult for ISVs to get access to the lead generation and marketing support that come along with those designations.
As marketplaces become more crowded, this could deal a critical blow for smaller ISVs.
“Discoverability is a key challenge,” said Jakob Nettelbladt, chief product officer at Mentimeter, which is listed on AppSource. App stores have “so many familiar and not-so-familiar tools, services, and brands to try out,” it’s easy to get lost in the noise, he said.
“I think if your strategy is to think about marketplace discovery, you're on a losing streak,” Canonical’s Gallagher reiterated. “Marketplaces aren't really there for discovery, although I can see how there could be a halo effect of being up top.”
Microsoft can sometimes be very picky with their requirements, and they keep changing every single year.
Since Microsoft controls its app stores, it can also exert control over which apps get more visibility. For several partners Protocol spoke with, the reason some apps get featured over others in Microsoft’s stores remains a mystery.
“I’ve asked that question many times and can never get an answer,” said Alon Ekelund, CEO at iGlobe, a CRM application listed on AppSource. Ekelund asked because he noticed that some apps with very low ratings or even no ratings were featured prominently on the home page.
Microsoft was unwilling to reveal much about its strategy when Protocol asked about app discovery. “I mean, the featured apps, it's one of these things where we're a little guarded as to what exactly goes kind of in that algorithm, as you might expect,” said Microsoft’s Swenson.
The secrecy makes it easy to imagine Microsoft shifting its algorithms to give preference to its own products and services over others. But Microsoft claims it's not thinking about the power dynamics of its marketplace in that way.
“I am not interested in gaming or steering the growth of the ecosystem so much as I am reducing the friction to [business-to-business] commerce happening,” said Swenson.
Regardless of how Microsoft thinks about its marketplace, or how explicitly or not it tries to control it, the reach and scope of the cloud giant means every action the company takes will have an impact on the enterprise software industry. And as cloud spending increasingly consolidates through Microsoft’s marketplace, it could shift the power dynamics of the entire industry.
The process of creative destruction has propelled the tech industry forward for decades, as the old guard makes way for new companies and ideas that shake up the existing power dynamics. The enterprise software platforms that dominate today’s world are working very hard to make sure those new companies and ideas spring forward on their terms.