Microsoft To Offer Office Software On Web

[ShiftPoint]

http://online.wsj.com/article/BT-CO-20090713-711000.html

SAN FRANCISCO (Dow Jones)--Microsoft Corp. (MSFT) said Monday it would offer a free, Web-based version of its Office tools, the company's most significant acknowledgment that it needs to alter a decades-old model of selling boxed software as it battles competitors like Google Inc. (GOOG).

The announcement is the latest milestone in an 18-month-old strategy by the world's largest software firm to offer more of its core products via the Web. The Office suite of products includes the Word word processing application and Excel spreadsheet.

In offering Office over the Web, the Redmond, Wash.-based company is trying to grab a larger slice of a burgeoning market for online software services without damaging the profitability of its products, the large majority of which are still run on PCs or corporate servers. Most of Microsoft's profitability comes from two business units, the ones that make its Windows operating system and its business tools - like Office.

The move ramps up competition between Microsoft and Mountain View, Calif.-based Google, which said last week it was developing an operating system that would challenge Microsoft's Windows software. Previously, it had launched a free, online applications service, called Google Docs, which offered many of the same functions as Microsoft's Office.

Microsoft for its part is trying to muscle in on Google's core market: Internet search advertising. Last month, Microsoft launched a new search site, called Bing, which has attracted users, though it remains far behind Google's dominant product.

Microsoft is also working on another project, code-named Gazelle, that is a hybrid of of an operating system and Web browser.

Stephen Elop, who runs Microsoft's Business Division, said in an interview that making some of its Office products available free should help the company expand its overall business customer market.

While traditional office productivity tools, like spreadsheets, are experiencing slower revenue growth than some newer products, Microsoft has an opportunity to reach more customers with hosted business services such as email and collaborative applications, he said.

"These are new opportunities to grow profit and revenue in absolute dollars," Elop said.

Between 20% and 25% of the revenues associated with Office come from consumers, Elop said.

Microsoft doesn't break out total Office sales, but the products account for the bulk of the $19 billion sales from its Business division in 2008.

Sandeep Aggarwal, an analyst with Collins Stewart, estimates that Microsoft gets roughly $4 billion in revenue from consumer users of Office, the ones most likely to use the new Web-based version of the software.

Tom Austin, a vice president with technology research firm Gartner, said Microsoft's Office strategy indicates it is trying to shift the profit-generating engine of the Office business unit toward hosted services, like email, rather than tools like word processing programs.

Austin said Microsoft appears willing to accept lower profitability on its Office products in exchange for greater reach, which it can use to boost overall revenue by selling business customers email and other collaboration services.

Microsoft said its Office Web applications would be available through Windows Live, which has more than 400 million customers. Consumers will get access to the Office Web applications for free.

Large volume license customers for Office will be able to get the services on premise and via Microsoft Online Services, where customers will be able to buy a subscription as part of a hosted offering.

Microsoft doesn't expect all its customers to abandon paid versions of Office, Elop said. He pointed to areas of new functionality, such as the ability to edit video in Powerpoint, which was best used on desktop-based software, that might persuade customers to pay to use higher-end versions. Elop says the majority of customers will continue to pay for Office for some time.

Microsoft said it would cut the number of Office editions to five from eight. Starting Monday, a select group of people will be able to preview the new Office 2010 as part of its preview program.