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Microsoft (NASDAQ:MSFT) has certainly stirred the pot with its latest cloud computing offering, Dynamics Live CRM, a service that aims to take business directly from Salesforce.com (ticker CRM), according to its latest ad campaigns online. Microsoft Dynamics product has previously been marketed on price vs. Salesforce.com, but the addition of Outlook compatability and the Windows computing standard has leveled the playing field to some degree. As Bruce Greenwald recently noted about Android's use of Windows-based systems, customers still like Windows-based products because the Windows platform is user-friendly and cost-effective.

When looking at the numbers, it is hard to argue from purely a price perspective that MSFT Dynamics is not a better deal at $44 per month, compared with Salesforce's $1,200 yearly per-user fee. Microsoft touts the fact that its cloud service works in Outlook in real-time, versus a delay of up to 30 minutes for the Salesforce offering.

Unfortunately for CRM investors, first mover advantage in technology is not always a guarantee of making the big money over the longer term. Success is not always about having the best idea, but about having the best balance sheet and distribution network to bring that idea to the marketplace. To Salesforce's credit, the company has hired a large sales team of its own and has expanded its headquarters in San Francisco to build its distribution network.

Salesforce has countered MSFT's assertions that its product is a better deal by stating that, "The industry is moving toward software as a service with a quickening pace. Today's businesses want a wide choice of integrated on-demand applications to work with their CRM. They want to be able to create any application on demand. That's why we introduced the AppExchange -- our marketplace of more than 600 on-demand applications built by more than 300 partners -- and Apex, the world's first ever on-demand programming language."

Software-as-a-service (SAAS) is obviously a huge transition from the status quo in the software space, but from an investment perspective MSFT appears to be the better value. At 10X forward earnings for MSFT vs. 122X forward earnings for CRM, MSFT's valuation is much more compelling from a long-term investment perspective -- especially if MSFT can eventually copy most of the major benefits that Salesforce users currently enjoy. If Microsoft can deliver a similar service for a lower price, it will end up slowing Salesforce's growth rate. After all, MSFT will never stop upgrading its service just as it has done with Windows Office. It's not like it's completely stuck in the 1980s; after all, Bill Gates and Steve Ballmer are stil behind the wheel of Dynamics.

The lower relative valuation, even when discounted for CRM's much higher growth rate, likely reflects the perception that Microsoft is a riskier long term business model, given the huge growth in SAAS. The higher multiples placed on its cloud competitors should lead Gates to take a major interest in seeing MSFT successfully meet demand for SAAS in the future. The Street is likely discounting MSFT's core software business due to threats from Salesforce and others.

In my view, MSFT is merely protecting shareholder capital by directly attacking Salesforce in its advertisements and offerings. SAAS presents a real challenge to MSFT going forward, and as a Microsoft investor it is good to see it addressing these concerns by facing its fears and battling back from the belief that software is dead and that SAAS is a Windowless future. For now, it seems to me that MSFT can undercut CRM on price. The development capabilities that CRM AppExchange provides may be a durable competitive advantage for the long term, or MSFT could eventually gain market share as it refines its product.

MSFT's recent offer to Salesforce customers:

Save big while increasing production by switching over to Microsoft CRM and do it with no additional service fees. With overall savings of up to 70% and increase in productivity you will greatly decrease your CRM operating costs.

Dynamics Four will transfer your existing data, customize your system, and get were your company needs to be with Zero service cost.

Need training? Dynamics Four will also provide 2hrs of free training to get your organization moving on the right track to success.

Now, I am not a CRM expert, and have not tried both services, but a 70% savings is nothing to sneeze at when trying to decide who will win the battle of SAAS. Just as Wal-Mart (NYSE:WMT) can sell new DVDs below cost to drive foot traffic, MSFT has the balance sheet and ingenuity to thwart off Salesforce.com's increasing market share. Salesforce execs have repeatedly called the MSFT Dynamic offering an "inferior product." At 256X earnings, Salesforce better be right about that assertion, or CRM stockholders could be nudged off of the 250 PE cloud.

Source: Microsoft to Salesforce: 'Hey You, Get Off of My Cloud'