I've avoided commenting on Microsoft's announcement to enter the hosted CRM market in 2007, but the news is widely covered, so it's worth sharing a few observations.

1) Microsoft's vision of the software+service model is a winner; if it can be executed.

Microsoft would like business users to continue using Outlook and not even realize that they're using a CRM system. Your Outlook software is wired to a CRM service that logs every email interaction, appointment, and contact record.

But Salesforce.com could just as easily create better Outlook plug-ins to address this requirement.

2) Microsoft CRM will continue to be built on their Active Directory and Exchange servers, which were not designed for the Internet hosting era. Microsoft says that they will bear the brunt of this overhead by hosting CRM for businesses.

This will be a great feather in the cap for Engineers, but from a business perspective I think the hosting costs and SLA challenges will be a huge, and ultimately unprofitable, drain on Microsoft resources.

3) Microsoft will be very price competitive and they won't care about profitability for at least 3-5 years. This means that customers might get a workable CRM solution for 40-70% of the cost of Salesforce, but it also means that if Microsoft does not reach at least $500M in annual revenue at the end of 5 years, the whole product line could be shelved.

4) Salesforce.com has a better partner strategy. There will not be an equivalent to AppExchange when Microsoft Live is launched. Salesforce.com does a great job of acknowledging the broader Internet ecosystem and encouraging partners and customers to create "mash-ups" with other systems.

This outer locus of control is counter-cultural to Microsoft. Microsoft Service partners will be the big winners (not ISVs).

5) Microsoft is closer to offering businesses a whole solution. They have an array of back office applications at their disposal, which will give customers the ability to transfer CRM opportunities directly over to Accounts Receivable, Inventory, and Shipping processes.

But Salesforce.com's open web service API makes integration with any Back office system feasible and partners are sure to fill the demand (such as with SAP and Oracle Financials).

6) Microsoft's record of hitting product launch dates is not very good. The mid-2007 target is really aggressive and they still haven't released Vista. The announcement was primarily intended to get Microsoft Partners excited at a recent partner event.