It was pretty clear when we predicted it last November, and it’s even more obvious now: Microsoft is missing a huge opportunity to disrupt competitors, and seize the initiative in the IT industry’s shift to online software delivery. I’m not talking about Microsoft’s Windows Live or Office Live betas – I doubt Microsoft will do anything very disruptive with its $15 billion desktop software franchise in the near future. Nor is the market thirsting for Windows and Office to be wholly delivered online.

Microsoft’s big disruption opportunity (at least in the Enterprise market) is to launch what I’d call Dynamics Live: pushing its Dynamics line of enterprise applications – Financial Management, CRM and Supply Chain software – right onto the Web, making these offerings available to customers via online delivery directly from Microsoft, a la Salesforce.com, Oracle, and – most recently – SAP (see SAP Jumps into the SaaS Pool: Will It Sprint or Tread Water?).

Some may argue that Microsoft largely did this with its March announcement of a Service Provider version of Dynamics CRM (see IDC doc #201192). But no – this allows Microsoft partners to sell Dynamics to end customers in a per-user, per-month “on-demand” pricing structure. While that’s an important first step, it leaves Microsoft in the background, letting its partners take the lead. Frankly, I think this is an outdated strategy.

Yes – a decade ago, any company with indirect distribution that moved online and connected directly with end-customers was seen as “disintermediating” its partners. But today this is a foolishly narrow view. The Internet allows – and increasingly, requires – companies with large partner networks, like Microsoft, to play a much more direct, “inline” role to promote its partner network, by creating a highly visible, heavily trafficked ecosystem hub or “platform”. Think eBay, Amazon, Google…

And the time is certainly ripe for Microsoft to make a disruptive move. Microsoft’s progress in gaining enterprise applications market share – playing by the traditional packaged software rules – has been modest, relative to its investments and strategic interests. At the same time, the online software delivery model is at a watershed moment: the market needs – and will reward (see The IT Market’s $150B SMB “Long Tail”) – one or two major player(s) who act as market-makers in this space, shoving the market toward the new model in a dramatic way. It’s a very good time for Microsoft to seize the initiative, and create Dynamics Live: such an online delivery hub would do far more – and faster – to attract attention to Microsoft’s enterprise applications (and its partners’ offerings built on those applications), than waiting for a scattered “network” of independent sites running on Dynamics to drive market growth.

But such a move is not without risk, of course: it would certainly shake up Microsoft’s partner network. If Microsoft were to create Dynamics Live, it would challenge partners who add marginal value. Customers seeking a “vanilla” version of Microsoft’s applications – devoid of local service, and uncustomized to the needs of vertical segments – would likely do business directly with Microsoft, not with a partner. But do those partners really matter to Microsoft and its customers? In the emerging, web-delivered world of software, partners focused primarily on physical distribution of packaged software are going to be a shrinking group.

The partner value-add that will continue to matter, and where the greatest growth for partners will be, is in taking a broad “platform” – like Dynamics (or, for that matter, SAP’s NetWeaver and core applications, Oracle’s Fusion platform and applications, and IBM’s WebSphere platform) – and extending the platform with functionality and service, aimed at a growing variety of previously unmet, “micro-niched” customer needs (increasingly via on-demand, online delivery).

Microsoft and its partners need to think about how to make the new hub-and-network model work in their ecosystem, rather than take a cautious approach that is focused on avoiding all possibilities of competition. Indeed, we believe channel partners – at least those who are going to survive, as the industry transitions to a new delivery model – will welcome Microsoft getting more directly involved in online delivery. In the world of Google, eBay and Amazon – smart partners understand that a successful Dynamics Live hub, around which they could build and sell their own verticalized or otherwise value-add, “services”, is an important piece of the formula for their and Microsoft’s collective success.

If Microsoft and its partner network don’t take the initiative, customers don’t have to worry – others are lining up to do so. Salesforce.com, of course, has been driving this vision for quite awhile. Last Fall we wrote about the potential we saw for Google to become an online delivery platform for applications to SMBs (Is Google the Next “Disruptive” Enterprise Application Platform/Ecosystem?), and in the past several months Google has started to move in this direction. And, no doubt, other “non-IT” players (e.g., eBay, AOL) are exploring the potential. SAP and Oracle have large packaged application businesses to protect, so I wouldn’t expect them to push the online model too aggressively – even though both have introduced online offerings. But a big, traditional player I would look at as a wild card disruptor is IBM. IBM doesn’t have a packaged enterprise applications business to protect – its focus is on application infrastructure (WebSphere). But IBM sits at the center of a very big application ecosystem, having recruited a large group of application vendors whose packages leverage the WebSphere platform.

I’m not rooting for or against Microsoft, nor am I rooting for or against its competitors. But I am rooting for suppliers to accelerate delivery of a capability that the market needs. It’s a critical time for Microsoft (and others, including IBM) to stop playing the enterprise applications business – and managing partner network relationships – by the old packaged software rules, and use its clout to accelerate the online software delivery transition, where it has the least to lose and the most to gain.

[P.S.: For curiousity, I did a Whois lookup on the domain name "DynamicsLive", and found that some enterprising (perhaps "speculating") folks have recently laid claim to both the dynamicslive.com and dynamicslive.net domains. I would not be surprised to learn that Microsoft has already come calling. A note to Microsoft: as of today (May 10th), dynamicslive.org is still available.]