Business in the Cloud

Yesterday, Microsoft officially launched Microsoft Office 2010.  At the same time they announced a free version of Office that will be available in the cloud.  The free version is clearly meant to counter the inroads that Google is making on the office productivity software market with Google Docs.  International Data Corporation (IDC) took a poll of IT users in July 2009
and found that:

• 97% of enterprises had at least one version of Microsoft Office in house.
• 19.5% had at least one version of Google Docs, up from only 5.8% the previous year.

Microsoft Office is still clearly the overwhelming market leader.  It is the main part of Microsoft’s $19 Billion Business Division, delivering 1/3 of Microsoft’s revenue and about 1/2 of Microsoft’s net profit.  Yesterday’s announcement was a clear indication that Microsoft it taking the challenge from Google very seriously.  Google claims that 19 million users have signed up for Google Docs.  I would assume that the number of active Google Docs users is something less than that, but it is still significant.

From a business model point of view the free online version of Microsoft Office is a risk for Microsoft:

• Offering a free version will undoubtedly cannibalize some of their existing $19 billion in revenue.  The question is: how much?
• Will the increase in new users offset the loss in existing paying users who opt to use the free version of Office 2010 instead?
• Will a free cloud-based version of Office counter the threat from Google, or will it legitimize the cloud-based computing model and help Google?

It’s a classic Innovator’s Dilemma problem.  Microsoft had to act.  Doing nothing would have meant that Google would slowly eat away at Microsoft’s Office market share over time.  Doing something will keep them in the game, but at what cost?  Microsoft says that the free version of  Office due to ship “later this Summer” will be made available on an ad-supported revenue model.  Google says it has “no current plans” to include advertising on their free Google Docs offering.

I’m going to be teaching a class in MBA level Marketing at the University of San Francisco this coming Fall.  Looking at the latest chapter of Kotler’s “Framework for Marketing Management,” the gold standard for marketing for decades, the chapter on Pricing does not mention pricing for free.    There is a whole new world order out there that is disrupting Marketing and business models in general:

• Free and less-than-free pricing.   Google Re-defines Disruption: The Less-Than-Free Business Model.
• Social media, or Inbound marketing.
• Business Models built on the Network Effect: in networked models, the value of the product goes up with them more users who use it, presenting a huge barrier to entry to late market entrants.

I am really looking forward to teaching the “Five Ps” this Fall!

In the meantime, Microsoft has a serious business problem.  Google is disrupting their biggest and most profitable business division with a series of moves:

• A free version of their office software.  Google doesn’t claim to have all the features of Microsoft Office, just those that most people use every day.
• Truly free: no advertising.  At least for now.
• A cloud-based computing model.  This has several advantages:
  • Designed with collaborative use in mind.
  • Available from any browser on any computer or handheld.  Anything that can run a browser.
  • Files are stored in the cloud.  No worrying about backup or where you left a file.

Microsoft truly has no option but to cannibalize their own existing product line.  Either they do it, or somebody else will.  To Microsoft’s credit, they appear to be making the rights sorts of moves.  On the other hand, Google is not sitting still either.  In March, Google acquired DocVerse, a company that makes it easier to move files to the cloud and to collaborate.

Every move Google makes costs them nothing and gains them market share in a new market for them.  Every move Microsoft makes will eat into their existing revenues and profits.  This is shaping up to be a difficult and disruptive battle.

There is a truly huge market opportunity at stake here, but this battle is just beginning.