Has Microsoft Just Introduced a 20% Tax on ISVs?

For those partners and customers who pay very close attention to the Dynamics ecosystem, last week’s announcement from Steve Guggenheimer concerning a new ISV partnership program that is launching in July was big news.

There are many benefits and improvements discussed in the detailed announcement, including new tools for ISVs, consolidation of the various systems used to list and distribute ISV solutions, and much more. The announcement also promises another overhaul of AppSource, which has never realized its full promise for a variety of reasons. You can click on the link to find more details about the new ISV program.

All of these steps are sure to be welcomed by Dynamics ISVs who have not previously had a very clear path to partner with Microsoft.

It is long overdue for Microsoft to invest in maturing these systems in order to provide a true, vibrant marketplace for Dynamics customers to discover the rich variety of powerful tools and applications that can help accelerate their digital transformation.

But one of the most significant facets of this new program is that Microsoft will also begin demanding significant “revenue sharing” from ISVs in the form of a 10% or 20% cut of all sales to Dynamics online customers. Any ISV who makes an add-on or a vertical solution for Microsoft Dynamics 365 CE will have to get Microsoft’s seal of approval by certifying their app and listing it on AppSource, and then pay 10% or 20% to Microsoft, depending on the “tier” their app falls into. (The definition of what qualifies as an app for one of the two tiers is still quite vague, and there are many open questions about things like Internal Use Rights licenses that ISVs depend on.)

This “revenue sharing” might seem fair to a new ISV who is just getting started and who believes that AppSource will be sufficient to build their customer base. But for those partners who have spent years building their own sales and licensing models, there seems to be little benefit – at least in the near term – to forking over a significant chunk of their revenue. After all, the ISVs will still be responsible for marketing and selling their solution, supporting it and securing renewals. Many customers will still rely on trusted partners to help them determine the right ISV solution for their business requirements, and to help them test and implement them correctly. AppSource won’t become a magical sales engine overnight.

It is also difficult to see how these changes will add real tangible value to the end customer. ISVs are likely going to pass these new costs on to the customer by jacking up their prices by 10-20% so they can afford to give Microsoft their pound of flesh. But in return, what added value will the customer see from this?

While it is clear that Microsoft needs to renew their commitment to AppSource and ISVs, the demand for a chunk of revenue before AppSource is a proven sales and distribution channel is going to be a bitter pill to swallow for many ISVs and will likely cause some confusion among customers as to why their costs suddenly increased. For another take on these changes to the ISV ecosystem, please consider this post by Steve Mordue on the subject.

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