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Welcome to Microsoft Pri0: That's Microspeak for top priority, and that's the news and observations you'll find here from Seattle Times reporter Sharon Chan.

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May 10, 2010 5:39 AM

Office 2010: Microsoft makes a free version of its cash cow

Posted by Sharon Chan

office2010prof.jpgIn case you missed it, this story ran in Sunday's Seattle Times on Office 2010. When Microsoft launches its latest business and personal software suite Office 2010 on Wednesday in New York, it will introduce a free version, Office Web Apps, to compete with Google. I will be covering the launch event in New York. Follow my updates here at Pri0 or via Twitter at www.twitter.com/sharonpianchan/

In the beginning, there was word processing.

Then, simply, Word.

Spreadsheets became Excel. Presentation software, if it was ever known by such a name, was simply PowerPoint. Long before Google's preeminence in search, Microsoft dominated business and personal software with a suite known as Office.

The company launches its latest version, Office 2010, on Wednesday in New York â€" and the stakes couldn't be higher.

The lucrative franchise is threatened by a changing market spouting a four-letter word: free. The biggest threat comes from Google, specifically Google Docs, Web applications accessible from any computer.

Because of Google, Microsoft has been forced to make a free ad-supported version called Office Web Apps.

Google's software is unlikely to depose Office, especially among heavy business users who write reports, draw up corporate budgets and put together sales presentations. But Office 2010 does represent a slow tipping of the entire technology industry, from a PC world Microsoft long has dominated to a cloud-computing world, where software roams free on the computer, phone, tablet and television, and the old ways of making money are changing.

"We think it's actually an opportunity for us," said Stephen Elop, president of Microsoft Business Division, which makes Office. "We have an opportunity to draw in many, many people who today are not engaged in the Office experience, or have not paid for software along the way, or are on very old software."

Wednesday's event at NBC Studios in New York will mark the first day business customers can buy copies of Office 2010 that gets installed on PCs. The software will start selling in stores to small businesses and consumers sometime in June. The free Office Web Apps also will be available to consumers in June.

Microsoft's challenge

Free is not a part of Office's history. The Business Division, whose chief product is Office, brought in $19 billion in sales in fiscal 2009, more than a third of Microsoft's $58 billion in sales for the year. It generated more than half of the company's operating profit â€" $12 billion of the overall $20 billion.

But Microsoft's ability to sustain these numbers is being challenged by the new way people use technology.

"As the world goes increasingly more and more mobile, the way people want to access and use applications is increasingly shifting to the Web," said Sarah Friar, an analyst at Goldman Sachs who follows Microsoft. "Google becomes the face of that beast, but I think it's a broad industry shift, not just Google, that is bringing Microsoft around to this."

Instead of selling copies of Office, the company may have to find other revenue streams, including advertising to underwrite free software.

Much is riding on the company's next steps. Microsoft estimates 500 million people use Office, many of them still chugging away on Office 2003 or even older versions. About half the users are believed to have paid for it. The others have not, many of them using pirated versions.

Microsoft is less worried about piracy, more worried about people who choose Google Docs instead.

Four years ago, Google began offering the stripped-down Web-based word-processing, spreadsheet and presentation software to compete with Office.

Google Docs saves each file on a Google server so people can access it from any PC or device rather than saving it to a thumb drive, e-mailing it back and forth as an attachment or physically being at a specific computer to open a file.

The public version of Google Docs is free to individuals, and Google sells the software to businesses for $50 per user each year in a suite called Google Apps. The paid version has more security, privacy controls and customer support, and it runs on a network with guaranteed service levels. Google says that, combined, more than 25 million people are using the free and paid versions.

"The way people work today is not reflected in the tools they have at their disposal," Google spokesman Andrew Kovacs said. "Office was built 20 years ago for someone sitting at a desk on their own. ... Google Docs, launched four years ago, it was about collaboration."

Chris Vander Mey, senior product manager at Google, called Office a great tool. "Every business should have two or three copies," he added. "We don't think everyone needs it. It's like Photoshop â€" not everybody needs it."

Spreading competition

To counter Google Docs, Office Web Apps will offer more features and what the company claims is a better visual presentation than its competitor. But Office Web Apps will not have all the features of Office 2010, which is being priced from $119 to $499, depending on the version.

"We've had a long history of lots of competition," said Chris Capossela, senior vice president of Microsoft Business Division. "We have to focus on a really great product our customers will love. We think that if we do that, we'll continue to be the leader."

That competition has spread on the Web. A month ago, Microsoft launched Docs for Facebook, building a free Web-based version of Office that works inside the social network. Microsoft also recently laid claim to the URL www.docs.com.

Capossela said the Office team has been building its new version since Office 2007 came out in 2006, with a focus on working across the PC, the browser and the phone. Seven million users have downloaded the test version of the software, the company reports.

The free version of Office Web Apps will have advertising; Google says it has no plans to add ads to Google Docs.

New Office features

As always, Microsoft has put much effort into building new features for the software.

Office Web Apps, for instance, allows users to create, edit and share Office docs with people who have Office and those who don't. Two people could simultaneously edit the same spreadsheet, Word document or PowerPoint presentation from different locations through a PC, the Web or a Windows Mobile phone.

"It's nice to be able to walk to any PC connected to the Internet and you can use Office Web Apps to create docs. You can round-trip the files from the PC to the phone to the browser," Capossela said. "Nothing is gone. The pictures, footers, headers will all be there."

The Office team also built a new social-network feature into Outlook, the Outlook Social Connector, so users can pull up contact information from Facebook and LinkedIn without leaving Microsoft's e-mail software.

A new video-editing feature was added to PowerPoint, and the new Word has a photo-editing feature.

Google dismisses the new Office features. "We're not about new features," Vander Mey said. "We're about new behavior."

Embracing the cloud

Observers say an Office that embraces the cloud is just the beginning for Microsoft. As Chief Executive Steve Ballmer has said, "we're all in" when it comes to the cloud. Microsoft has built large data centers in Houston, Chicago, Ireland and other locations to launch cloud services.

In January, the company launched its cloud-computing platform, Azure, which is courting software developers to build Web-based applications on a Microsoft-hosted platform.

The big question now is how the move to the cloud will affect the Office sales.

"Not all of it is going to be at risk, but you could see $1 billion being at risk over a couple-year period," said Goldman Sachs' Friar.

The customers Microsoft stands to lose most are consumers who now buy Office for personal use. Friar estimates that Office made $1.8 billion in fiscal 2009 from consumers. Consumers who already are adopting cloud-based software such as iTunes and Facebook are more likely to move to free Web versions than business customers.

Business customers, who Friar estimates make up 90 percent of Office customers, are unlikely to immediately make the jump, given that the free Web version will have online advertising, less security and privacy, no guarantees that the service would always work, and far fewer features than the PC version. These customers sign long-term contracts with Microsoft, paying an annual fee per worker with automatic upgrades to the latest version. It's slower, steadier income.

They eventually may move to the cloud, and Microsoft has to figure out how to bridge the PC past and the cloud future.

"It's going to force them to think through very different business models from how they get paid today," Friar said.

Sharon Pian Chan: 206-464-2958 or schan@seattetimes.com. Follow me on Twitter @sharonpianchan

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