Microsoft Office Online - Attacking the Innovator's Dilemma

Includes: CRM, GOOG, MSFT
by: Michael Arrington

Nick Carr has a lead on the story that we all knew was coming eventually: Key Microsoft (Nasdaq: MSFT) applications, including Office, may be moving online, soon. Carr’s source says to look for enterprise applications to move online as web services with Salesforce-like usage fees, popular PC applications to move online with advertising support, and expansion of its data center network to provide storage for everything.

In short, they’re responding to Google Apps and Google Docs, which now account, according to analysts, for up to 2-3% of Google’s total revenue (call it $400m a year, up from $40m a year ago) (note: I can’t find a source for this, but it was quoted to me by a senior Google employee last week). That’s still pennies compared to Microsoft’s $16b or so in annual Office revenue, but the trend is pretty clear - users like free, and they like the ability to collaborate on documents. Today, Google offers what is in many ways a superior product to Office and they don’t charge users for it.

That’s created a textbook Innovator’s Dilemma for Microsoft. And the people up in Redmond are probably smart enough not to simply roll over and die.

The obvious time to do it is at the Mix conference later this week. Where, we hear, Microsoft may also be announcing an offline version of Silverlight to compete with Adobe Air. Would Microsoft release online versions of office via the Silverlight platform? Perhaps… Adobe has their own version, called Buzzword.

In the middle of this sits Salesforce (NYSE: CRM), the king of software on demand. At some point Google or Microsoft will make a serious move to acquire them, and at that point the other will respond with a counter. That at least partially explains why Salesforce continues to be valued by the market at an absurd P/E ratio of over 600 (their continued revenue growth is another reason).


Now I fear that the rumor may have been wrong, and that Microsoft has no such plans in the near future. Tonight Microsoft announced an expansion of their “software plus services” strategy that gives businesses many of the collaboration and storage benefits of Sharepoint without actually having to install software on their own internal machines. The program was initially launched in September 2007.

This is not a web based version of office. It’s not competitive with what Google is offering businesses with Apps and Docs. It’s a half way approach that still requires the installation of Office and other software on local machines. It sacrifices some Sharepoint revenue, but does not put Microsoft’s $16 billion Office business at risk.

Which means Microsoft is giving more time for Google to eat their lunch.

Unless something else is coming. In an email to Microsoft PR I asked “Is this the big announcement? There’s nothing else wrt online software coming in the next week or two?” The answer - “I can’t comment on rumors, but wanted to flag this for you because it is related.”