Is Google Apps a threat to MS Office?

On March 29th Wall Street Journal published this article ‘Microsoft Office Faces Challenge From Free Google Tools’. But they did not asses the actual seriousness of the situation Microsoft is facing. Microsoft is losing billions of dollars over the next few years and market share.

So, is MS Office really under threat ? We’ll if $4.3 billion in lost revenue annually sounds good then read on!

Microsoft has achieved unmatched success and high adoption for MS Office over the years; it has been a cash cow for Microsoft Business Division [MBD] and contributes 90% [1] of its revenue. However, with the emergence of new disruptive technologies, increasing internet penetration and technology savvy workforce real time collaboration and low costs are of high importance.

Due to the emergence of these technologies on an average $4.3 billion (7.6%) [exhibit 1] of Microsoft’s annual revenue is under threat. The measured ‘expectations rating’ of Web-based office productivity is the highest on Gartner’s Hype Cycle [exhibit 3]. Microsoft’s competitors have successful launched online office productivity applications and the number of adopters (consumers and corporate) is rapidly growing e.g. Googledocs was adopted by .0082% [exhibit 2] of the total internet population in year 2008.

Microsoft’s competitors are rapidly rolling out new features and users/companies are increasingly adopting the use of consumer grade technologies, because they provide them an opportunity to translate fixed costs to variable costs. Eventually customers would use the increased options as a price negotiating strategy towards MS Office. This is one of the single greatest threat to MS Office in the next three to five years. Microsoft is going to face the challenge of launching a complete online productivity suit without cannibalizing it’s existing products and at the same time competing with the online pricing models of already successful competitors.

On the other hand compared to Microsoft’s competitors, who have provide only basic functionality in their products, but MS Office provides superior features and users use other online products as a supplement to MS Office. MS Office also had an advantage given the facts that people require to work when disconnected from the internet and cannot count on continuous internet connectivity. Customers are also anxious about security in ‘online office productivity suits’.

Going forward MS Office teams should focus on developing a rich online office suit functionality which will not only support offline work but also would include seamless online synchronization with MS Office. Such a capability will enable users to leverage the strengths of MS Office and at the same time benefit from real time online office collaboration.

Since, MS Office is trusted by millions of customers worldwide, if priced competitively the new web-based MS Office would provide corporate customers with options to either use cloud based office or on-premise in a cheap and secure way. This would not only retain there existing customers but also prevent considerable erosion of the market share.

Exhibit 1

Year 2009

1. 80% MBD revenue from Corporate Sales: .80 * 18,894 = $ 15115.2
2. 20% MBD revenue from Consumers: .20 * 18,894 = $ 3778.8
 Assumption1: Most (> 90%) of MS revenue is effected by Googleapps and Openoffice.org which lie in the consumer section (20%).
 Assumption2: Less than 5 % corporate clients are switching from MS office productivity applications to competitors such as Google enterprise solutions, IBM, Novell etc.
 Assumption 3: This analysis excludes the threat of other Business Solutions (ERP etc.) threats.
a. Based on assumption 1 roughly 6.46% of the total MS revenue is under threat from the competitors who provide cloud office productivity applications: ((3778.8 / 58,437)*100) = 6.46%
b. Based on assumption 2 roughly 1.29% of the total MS revenue is under threat from the competitors who provide corporate office productivity applications: ((( 15115.2 * . 05)/(58437))*100) = 1.29%
c. Conclusion: In year 2009 roughly 7.75% (approximately $4.38 Billion) of the total revenue of Microsoft is under threat from competitors competing in the Office productivity Business Solutions market.

[#] All figures are in millions
[x] Income statement Microsoft extracted from 10K filings year ended June 30, 2009
[y] Income statement Microsoft Business Division extracted from 10K filings year ended June 30, 2009
[1] Extracted from 10K filings year ended June 30, 2009

Exhibit 2: (Reference: The State of Google Apps, Gartner ID Number: G00157039, 2 May 2009) Google Apps Usage

The following data, from Hitwise, illustrates the rate of growth in the usage of docs.google.com.
(The vertical axis represents the percentage of total Internet traffic.) This Hitwise chart does not
distinguish between business and consumer activity. It is not clear to Gartner that any Web-traffic analytics firm is fully capturing business usage of Web 2.0 properties. Nonetheless, the chart illustrates the growing use of Google Apps in general.

Exhibit 3: (Reference: Hype Cycle for the High-Performance Workplace, 2009, Gartner ID Number: G00168335, 24 July 2009)

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