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Microsoft Updates Office, Challenges Google

May 12, 2010

Microsoft Corp launched an updated version of its Office software on Wednesday, hoping to keep its grip on the application market as it faces challenges from Google Inc.

The world’s largest software company is upgrading its profitable Word, Excel, Outlook and PowerPoint applications, as well as making online versions of the software to compete with Google’s applications.

Most are expecting the Office franchise to maintain its position in the business world.  However, Office – which Microsoft says has 500 million users – could be facing the beginning of an erosion of its “must-have” status.

“Every time Microsoft releases a new version of Office, they get a bump up in revenue,” Toan Tran, an analyst at Morningstar, told Reuters.  “But how big of an upgrade is this? They might have a harder time getting people to update.”

Microsoft is expected to announce a list of improvements on Wednesday, like editing photos in Word, using video in PowerPoint, collaborating on documents and managing e-mail conversations in new ways.

One of the bigger changes expected to be announced is that Microsoft is going to move into the “cloud computing” world by allowing its users to manipulate documents stored on remote servers, a market Google has been setting the pace for.

“They’re coming into our playing field,” Dave Girouard, the Google executive leading the company’s charge into business applications, told Reuters. “They (Microsoft) have conceded that this is the future and now we think our products and services will get a lot more consideration.”

Google Docs are available over the Internet with no need to download software.  They are free for personal users and $50-per-user per year for companies.  Google says it picked up 25 million users since its launch four years ago.

That is still only a fraction of Microsoft’s customer base.

“Word and Excel are pretty secure — Excel is embedded in an uncountable number of business processes, so that would be pretty hard to rip out,” Tran told Reuters.

But Microsoft faces more pressure in email and calendar program market, which are areas better suited to online and mobile use, where Google holds the majority of the market.

“Google has made a lot of inroads there. Microsoft is going to face pressure there over time. They are probably going to have to cut prices to some extent,” said Tran.

That could slam the brakes on one of Microsoft’s most profitable outlets.

Microsoft’s business division – which gets 90 percent of its revenue from Office – averages about $2.8 billion profit each quarter.  That is 47 percent of Microsoft’s overall profit so far this fiscal year, second only to Microsoft’s core Windows franchise.

Businesses account for the majority of that.  According to the latest data from tech research firm Forrester, 81 percent of companies run Office 2007, compared to only 4 percent using Google’s cloud applications.

A Forrester poll indicates about a third of existing Office users plan to upgrade to Office 2010 within 12 months.

Ordinary customers can upgrade their version of Office next month at prices ranging from $119 to $499, depending on the level of sophistication.

It will take at least a year before it’s made clear whether Microsoft has a winner and the extent to which customers are migrating to online versions and lessening reliance on installed software.

“Google is not the threat that it will be once the ‘virtual desktop’ becomes a no-brainer,” Richard Williams, an analyst at Cross Research, referring to the practice of accessing software over the Web, told Reuters.  “That’s the time Microsoft really has to worry about.”

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