With Office 365, Microsoft Hopes To Counter Google's Threat

With its new web-based version of the popular Microsoft Office suite of software, Office 365, Microsoft is attempting to reclaim territory that has been threatened in recent years by web giant Google and its Google Docs service.

For years, Microsoft was the undisputed king of software, with the sale of operating systems, like Windows, and applications, like Microsoft Office, at the heart of its success. Yet rivals have since threatened the company's dominance in software. One of the most noteworthy challengers has been Google Docs, which lets users create, share and access documents online, and is offered for free to individuals, but sold to businesses. As the advantages of and demand for cloud-based computing grow, the introduction of Office 365 signals Microsoft’s effort to ward off Google and defend the billions it earns from selling the software that still dominates in the board room.

Experts say that the still-emerging nature of the cloud marketplace means that Microsoft may be able to leverage its existing dominance in the enterprise market to keep ahead of Google, which has historically had a more consumer-driven focus, and still counts only about three million businesses as Google Apps users. Microsoft, meanwhile, boasts ten times as many users of its Office Web Apps.

But while Microsoft still has control over the enterprise market -- and is attempting to preserve it -- it's worth reflecting on the dimming star of RIM's Blackberry phone, a once dominant enterprise device that's been slowly overtaken by consumer smartphones like the iPhone and Google’s Android phones. More and more, employees are setting the tone of the tech that takes the office place. So will Microsoft be able to protect its place in the software pantheon?

"Microsoft and Google have been sparring over defectors from other platforms and have momentum, but Microsoft has far more momentum among enterprises," said Chris Voce, an analyst with tech research firm Forrester.

Office is Microsoft's cash cow, a key component of the company's business strategy and a cornerstone of its enterprise offerings, accounting for 30 percent of the company's 2010 revenue. With Office 365, the company is moving Outlook email, its SharePoint collaboration, and Office apps like Word, PowerPoint and Excel onto the web, letting users access the tools from any connected device. Microsoft's move is a clear strike against Google Apps, which have stolen away a small but troublesome percentage of its enterprise customers.

Microsoft launched Office 365 with an eye to small- and medium-sized businesses, where Google has had the most success. The service is not built for consumers. Office sales have long been an important revenue source for Microsoft, and were a bright spot in the company's last earnings report, which showed decreasing sales in Windows software as companies like Apple move to the forefront. Revenue for Office rose 24 percent from 2009 to 2010.

Though Microsoft is currently in the lead when it comes to selling software to businesses, Google's major strength may be its longstanding presence as the go-to cloud app for consumers. While enterprise customers do have to pay for access to Google Apps, ordinary users receive Gmail, and its suite of applications, such as Google's Office equivalents, for free. Microsoft's service runs from $2 to $27 per business user, and simply allows businesses that might already be using Office the option to go to the cloud with the services they already have in place.

"There is an element of consumerization of IT at play," said Voce. "If people use tools in their day-to-day lives, they're comfortable using them in the workplace. Google doesn't match Microsoft in terms of business sophistication, but they do have mindshare among users as a growing comfort. They have a lot of people who are very used to using their tools. The question is can the tools stand up in the business place?"

Google offers certain features to encourage users to make the switch from Microsoft. Google Apps Migration for Microsoft Exchange lets users move email, calendars, contacts and more, over to Google Apps. A Google Cloud Connect plug-in for Microsoft Office lets people use Google collaboration within the program.

Yet Microsoft has one huge advantage: 97 percent of businesses surveyed still use Office, according to IDC analyst Melissa Webster. And for the past two decades, Microsoft's products have been the standard in businesses, presenting Google with the challenge of converting entire companies over to an entirely new system. Further, Microsoft's Office products, like Excel and PowerPoint, include a higher level of sophistication and a wider array of features than their still relatively bare-bones Google Apps counterparts.

"Google offers a subset of Microsoft's productivity portfolio," Webster said. "Customers have to go elsewhere for web, video, and audio conferencing, for example. Microsoft's broader footprint gives it a big advantage -- given a choice between an integrated single-vendor solution (one throat to choke) and a multi-vendor best-of-breed approach, the best-of-breed vendors have to prove significantly greater value. That's difficult to do in a more mature market, where the feature sets in available products are already strong."

Still, Google, at least, has declared itself up to the task.

"Technology inevitably gets more complicated as it gets older," wrote Google Apps Product Manager Shan Sinha on the official blog. "Upgrading platforms and adding features results in systems that are increasingly difficult to manage and complex to use. At times like these, it's worth considering a clean-slate: an approach based on entirely modern technologies, designed for today’s world."

In the end, though, both Google and Microsoft may simply be battling the same demons. Cloud computing still poses major risks to users who must count on the security and reliability of important documents. The rise in the visibility of hack attacks in the past year has only hammered home the point that this is a technology still groping towards maturity.

"Cloud services for collaboration and personal productivity are in their infancy," Gartner analyst Matthew Cain wrote in an email. "For example, only 3-4% of the enterprise market for email is in the cloud, and it will not hit the 10% mark for a couple years. So it is very early days. But it is clear that the vendors that are early in the market –- namely Google and Microsof -- will have an early mover advantage."