Last July, I wrote about Google’s goal: Sink Microsoft by deploying Cloud-based Google Apps and, as a result, destroy the Microsoft Office money machine. Today, we’ll take another look at Google’s strategy and at Microsoft’s response with its just released Office 2010 which combines desktop and on-line apps.

First, the Cloud Gospel according to Google. Desktop bloatware is passé. Modern browsers can perform a magic trick: We, Google, maintain the applications on our servers, and we store your data as well—securely, trust us. For you, the experience is desktop-like. Word processing without Word. Spreadsheets without Excel. With one login and password, you can access your documents, create presentations, edit financials from any computer in the world that has an Internet connection.
If you’re on an airplane and want to edit your killer Board of Directors pitch, we’ll provide a local version of your files stored in what is technically called a cache inside your computer. You edit your slides and everything updates and re-syncs when you land and recover a Net connection. You have the best of both worlds: dual off-line/on-line modes. The magic relies on modern operating system, browser, and server technologies. The vast computing and storage power in today’s laptop does the rest.
To summarize: Take a laptop with a modern browser and you’re done. Everything--applications and data--resides in the Cloud. On-line or off-line doesn’t matter. It’s automagically synced.

Since it has no legacy business to protect, Google can offer free versions of its Web Apps. (As we’ll see later, they also offer paid-for versions.) Kill the $300-a-DVD Office Golden Goose and someday, my Son, all this will be yours: 1 billion users at $100/year…that’s a nice $100B/year service business. If you think I exaggerate, you’re right, but by how much? Facebook will have 500 million users sometime this year. The Google vs. Microsoft battle will play out over a decade or more. As a time perspective, Google will soon be twelve years old.

In the meantime, Microsoft isn’t asleep at the switch and they do have a huge legacy to protect. Last year, Microsoft’s total sales were $58B, down 3% from 2008.

(Numbers geeks can find Microsoft’s full 2009 Annual Report here. Note the Operating Profit, 35%. The company spends 15% of its revenue in R&D and 28% in Sales, Marketing and General Administration. Compare this to Apple’s 29.5% Operating Profit, 3% R&D, and 9% SG&A, with a comparable revenue level, in the $50B to $60B range annually. Microsoft’s Net Income is 25% of revenue, Apple’s is 22%. I used the latest available figures for both companies: FY 2009 for MS, Q1 2010 for Apple.) Microsoft Office represented 90% of the $19B Business Division sales, with a nice 64% Operating Profit:

Roughly 60% of all Microsoft’s profits come from Office and a little more than 53% from Windows OS licenses (or what MS calls its “Client” business):


So… Office + Windows, 60% + 50% = 110% of Microsoft’s Operating Profit? The math is complicated by the losses in something called “Corporate-Level Activity”…


...and, more importantly, by the hefty 73% operating loss in the company’s Online Services Business:

Microsoft spends about $5.3B to generate $3B in online revenue. Since it’s neither a philanthropic nor a poorly-managed business, MS isn’t passively shrugging off these losses. It’s making an investment, a strategic one. Not “strategic” in the sense that corporate minions use to explain away losses from politically correct activities; strategic as in winning the war against Google. With this in mind, Microsoft proceeds to do Google one better and delicately navigates the treacherous transition between desktop applications and the Cloud. They don’t want to prematurely cannibalize their fat desktop revenue, but they also don’t want Google to become the emperor of productivity Web apps, killing Office revenue/profits as a result. The story goes like this: Web-based apps are great, see our new Office Web apps “coming soon”:

On June 15th, you’ll be able to get the Office 2010 DVD, available today by pre-order at Amazon. (The Professional version is listed at $499; for the Home and Business user it’s a mere $279.99.)

I went one step farther. On the Office Live main page I clicked on the offer to create a free Website. Oops, wrong browser…only Explorer and Firefox allowed, dear. No Google Chrome, no Safari (for Windows or Mac). If you squint a bit, you’ll see the system requirements exclude Windows 7. The page is from another era, 2008…

Microsoft generously sends you to the Firefox download page, if you’re so inclined or Windows-less. Firefox it is and it works well:

I played customer and ordered a domain, It’s a nice simple process, all handled by Microsoft. Less than an hour later my shiny new domain was active and accessible from anywhere on the Net. In the meantime, I used the basic but effective Web-based Office Live tools to build a simple site:

No great shakes but it’s serviceable and easy to put together with no desktop apps required.

There are bugs. I tried to add a “Live Sites” blog module and was dropped into the Mactopia home page. It’s still a work in progress; the rendering of a PDF doc in the Live Workspace is terrible:

What Microsoft is doing—but hasn’t fully implemented yet—is clear. When Google says “Everything in the Cloud, you just need a browser on the desktop,” Microsoft answers “Everything on the desktop and in the Cloud.” A nice, familiar, fully functional application on your desktop and a browser-based subset in the Cloud. The best of both worlds. If the Microsoft approach sounds more complicated, if it looks like they’re trying to have it both ways…that’s true. But they might have the right strategy.

In practice, at least in my experience, Google Apps aren’t Office killers. I’ve been using Gmail in both the free and paid-for accounts. The basic email functions work well, but managing contacts is awful. (Months ago, I heard Google had an internal project called Contacts Don’t Suck. I’m still waiting.) A desktop address book in Outlook, Entourage, or in a dedicated app is vastly superior. And here the Cloud helps: You can sync your address book across computers and smartphones of almost any persuasion.
I’ve tried to use Google Docs to write, share, and edit these Monday Notes. Failure. Compared to any word processor, Google Docs feels clunky and constrained, and hyperlinks die when you download the document.
When it comes to acquiring a domain name and creating a Website, things get geekier. Yes, Google Checkout offers a simple way to pay for your domain, but Google doesn’t manage the registration. Instead, you’re thrown into a page where you must enter a number of special DNS records:

A piece of advice: Buy your domain name directly from Godaddy, it’ll be much easier to administer. One of my Google Apps accounts is free but when I had DNS trouble because of a site I was building, there was nowhere to turn—no phone number, no email, just user forums. Then I noticed something in my “Enterprise” (paid-for) account. There’s a Customer Support email address, an account number, and a PIN. I went back to my free account, signed up for the 30-day trial upgrade to the Enterprise level, got my question answered in two courteous and effective email exchanges, solved the DNS issue…and canceled the upgrade.Two take-aways.First, Google Apps aren’t “there” yet. They’re still clunky, to say nothing of managing the “stuff behind the desk”. They’ve been quickly upgraded--perhaps too quickly-- at the expense of the user experience. If managing Google Apps is as complicated as running an Office DVD install program, an important part of the Google theory falls apart. We see the trumpeted announcements of large organizations and governments that have turned to Google Apps, but what we don’t see is a courageous journalist going back to the proud early adopters a year later to tell us what actually transpired.
Second, the desktop client + Web app combination sounds more attractive. I like the agility and functionality of a local app and I’d like to be able to walk to any computer and edit the work I’ve “left at home” by syncing my data with the Cloud. Today, there are many good data syncing solutions: DropBox, SugarSync, Microsoft's SkyDrive (soon to be integrated with Office Live), Apple iDisk (a subset of the MobileMe service—works on Windows as well). With the synced services you save your work on your computer and the rest happens by itself. Your work is uploaded to the Cloud and updated each time you make changes; and you can open and edit your documents from anywhere with an Internet connection. You could use Google Docs as a document repository, but it doesn’t automatically sync—you must explicitly upload/download your work.

If Microsoft continues to straddle the local and Cloud implementations of Office apps, it could have a better product than Google: Familiar, robust Office apps for creating and editing your documents, and convenient “anywhere” access.
We know the sarcastic mantra: It’s a mere matter of implementation. We know the warts on Google Apps; we’ll have to see how the Office Desktop + Live combination develops as they move beyond beta.

Next week: The Apple version and another under-the-hood look at Web vs. local apps.

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