The increasing popularity of cloud computing has dramatically changed the manner in which we use our computers and other devices. We are no longer tethered to a desktop or even laptop to access our applications and files. In many cases, we can access our applications and data from multiple devices and locations. We also benefit from this portability and flexibility with increasing security for our data and the knowledge that we are typically using the most up-to-date software and virus protection. Storing our data and software in the cloud also reduces the local hardware requirements, thereby enabling lower cost devices for the user. Ironically, some users are still reluctant to trust their data to the cloud and they prefer the “security” of storing it on a local device. Of course there are times when having your apps and data accessible locally is necessary (such as when working offline), but the trend toward cloud computing is here to stay so we may as well accept it. Unfortunately, widely publicized security breaches such as the recent attack on retail giants Target and Neiman Marcus contribute to the skepticism of many, but they still won’t stop the widespread move to cloud computing or “Software as a Service” (SaaS) as referred to by many.
It wasn’t long ago that SaaS was somewhat of a niche concept, reserved for a finite number of primarily customer relationship management (CRM) products, but improvements in technology and resulting economies of scale have made it widely accessible. This presents a dramatic shift in the way Microsoft® and other software companies’ license and distribute software. Whereas Microsoft® traditionally offered perpetual license agreements which granted the user indefinite rights, cloud based licensing is typically non-perpetual or perhaps best described as “subscription based”. This benefits users as they only pay for the product as long as they use it, but if they use it long enough to incur more subscription payments than the cost of a perpetual license, the user comes out behind. Microsoft® currently offers the traditional perpetual license for Office® 2013, and also a subscription option for Office 2013, but these aren’t cloud based applications. Microsoft® released Office® 365 during 2011 to meet the demand for a cloud based solution and it has been met with mixed reviews. Many users, consumer and business alike, welcome the many benefits of cloud based computing and embrace Office® 365, but they also realize that the eventual cost may exceed that of a perpetual license for Office® 2013. Microsoft® has claimed that they want everyone to move to a cloud based subscription model as it results in a predictable recurring revenue stream, but in reality it could cost Microsoft® millions of dollars. The problem they’re facing is that while Microsoft® Office® has been the global standard office productivity suite for years, they are facing increasing competition in the cloud where, as we just noted, the market is migrating. Competing products such as Google Apps™ may not offer the robust functionality of Office® 2013 or Office® 365 but for many users, Google Apps™ provides more than what they need.
Another reason for Google’s® success is that they offer a pricing structure which is exponentially easier to understand than that of Office® 365 and in most cases, it’s also less expensive. Microsoft® has made public price reductions to Office® 365, and while they dismissed it as passing on economies of scale to customers as more customers subscribed, that is simply not something Microsoft® does. MS is in business to maximize revenue and profit and they’re not going to reduce prices because their cost overhead goes down. They are very aware of recent advancements Google Apps™ have made in the office productivity space and they’re often willing to grant concessions to preserve market share.
Office® 365 has been a limited success, largely due to brand loyalty and similarities and compatibility with Office® 2013 and previous versions. Office® 2013 and previous versions were successful largely because they offer a consistent look and feel to that of the industry standard operating system, Windows®. Office® became such a revered industry standard that there was little or no competition on the desktop or on locally based server deployments. Microsoft® has enjoyed unprecedented revenue and margins from Office Suites and individual apps within the suite (Word®, Excel®, etc.), but can they continue to dominate?
The technology landscape has changed, and Microsoft® should be very concerned. Not only are they facing extreme price competition from Google Apps™ and others, but they are also losing their ability to leverage their similarities with the “industry standard operating system”. Windows® remains the overwhelmingly dominate OS on traditional PCs with greater than 90% of the market, but as users increasingly rely upon tablets and mobile devices PCs are no longer the dominant device. In the mobile space, Apple’s® iOS and Google’s Android™ operating systems combine to control approximately 85% of the market. Ironically, Google Apps™ is now leveraging the success of their own OS with UI similarities in exactly the same manner as did Microsoft® when they designed Office to be similar to Windows®.
Microsoft’s® concern doesn’t end with losing Office® sales to Google®. Their longer term concern lies with a fundamental difference between the two companies products. Microsoft® is primarily a software company whose product, in this case, is Office®. Google® is a data mining company that uses applications such as search and Google Apps™ as a means to capture the data they mine. Since Google Apps™™ isn’t Google’s primary product, they could conceivably drop the price to zero as a means to capture market share from Microsoft®. MS can’t engage in a price war that could force them to give away their most profitable product.
It’s difficult to predict how Microsoft® will address this market shift, but cloud based applications are obviously not limited to MS Office®. Volume Licensing revenues will likely rely more heavily on Server products and Device and User CALs than in the past, but with increasing competition, users will have choices where they may not have in the past.