Google Apps: A Long-Term Threat to Microsoft's Packaged Software Business

Caris & Company analyst Tim Boyd addresses clients on the recent launch of "Google Apps for Your Domain" -- an addition to the already released (February) “Gmail for Your Domain.” His note follows:

Google (GOOG) announced the launch of “Google Apps for Your Domain”, a set of hosted applications for organizations that want to provide communications tools to their users without the hassle of installing and maintaining software or hardware. The new service, which is an expansion of the “Gmail for Your Domain” service that launched in February 2006, currently includes Gmail web email, the Google Talk instant messaging and voice calling service, collaborative calendaring through Google Calendar, and web page design, publishing and hosting via Google Page Creator. The service is designed to scale easily to accommodate growing user bases and storage needs while drastically reducing maintenance costs. Although the initial version will be ad-supported and therefore offered for free, a premium version of the product is being developed for “organizations with more advanced needs” (a.k.a. enterprise customers). Pricing details for the premium edition are not yet available.

Our thoughts on the announcement:

1. Although the current version of “Google Apps for Your Domain” is unlikely to gain significant traction among large enterprise customers because of its limited scope, it highlights the long-term threat that the software-as-a-service model in general and Google in particular pose to Microsoft’s (MSFT) (and others’) packaged software business.

2. The current package could be considered Google’s version of Microsoft Outlook (although Google Talk and Page Creator are differentiators). We expect that Google will eventually offer a software bundle that includes word processing and spreadsheet capabilities. In other words, a bundle that offers an alternative to the three primary pillars of Microsoft Office.

3. The launch is a positive for small businesses, who tend to benefit the most from hosted solutions due to restrictively high costs of licensing, installing and maintaining traditional software products.

We maintain our 1*/Buy rating on GOOG shares.

GOOG 1-yr chart: