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Who’s Not Happy With One Microsoft Corporation (MSFT)?

On the heels of a sweeping internal restructuring, Microsoft Corporation (NASDAQ:MSFT) has rallied to new 52-week highs on investor confidence in the new organizational hierarchy that may help combat the overarching bureaucracy that’s held back the software giant for years. Steve Ballmer outlined his vision of “One Microsoft,” one that would be unified.

Investors may be impressed, but there’s another important group of stakeholders that’s decidedly not: channel partners.

The changes were announced on the last day of Microsoft Corporation (NASDAQ:MSFT)’s Worldwide Partner Conference, or WPC, its annual gathering of business partners, resellers, systems integrators, and channel distributors. CRN details the backlash among a wide range of these partners, who are none too pleased about some aspects of Microsoft’s new strategic direction. These channel partners are incredibly important to Microsoft’s sales into the IT departments in the small and medium business, or SMB, market.

The dominant theme behind the restructuring is Microsoft Corporation (NASDAQ:MSFT)’s ambitions of becoming an integrated devices-and-services company, which inevitably puts it in direct competition with its partners on a number of fronts. Some believe that Microsoft is becoming too focused on what Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) are doing, and that all of the company’s products are now mere competitive responses.

For instance, COO Kevin Turner encouraged partners to bring their clients into Microsoft Corporation (NASDAQ:MSFT)’s own retail stores where they could buy Surface tablets directly from Microsoft. That’s like asking middlemen to actively cut themselves out of the equation.

The vast majority of these resellers aren’t allowed to sell Surface, either, as Microsoft Corporation (NASDAQ:MSFT) recently detailed its plans to expand Surface distribution. The problem is that the company is allowing only 10 of its large account resellers, or LARs, to offer the device. That’s just 0.01% of its total partner base in North America. That inevitably leads to a situation where some resellers may be forced to buy Surface units from larger competitors if they want to offer the tablet. Some of these channel partners have instead simply decided to offer competing tablets from Apple Inc. (NASDAQ:AAPL), Samsung, Hewlett-Packard Company (NYSE:HPQ), or Dell Inc. (NASDAQ:DELL).

Microsoft Corporation (NASDAQ:MSFT)’s new distribution strategy is to emphasize its own first-party retail network to sell to consumers, while leveraging its LARs for the big enterprise wins. The SMB segment is getting left out in the cold. One reseller exec even said he “went ballistic” after reading Ballmer’s memo.

Unfortunately, many of these systems integrators have little choice but to play ball. Microsoft Corporation (NASDAQ:MSFT) is the only meaningful platform that they can sell into the enterprise. Still, that doesn’t mean that Microsoft should leverage its domineering position and drag its partners along, kicking and screaming. Nothing good will come of that.

The article Who’s Not Happy With One Microsoft? originally appeared on and is written by Evan Niu, CFA.

Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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