News Column

Microsoft Hit by a Bolt From Google's Cloud

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It long seemed that Google's business software suite would appeal mostly to small businesses and start-ups, but the notion is catching on with larger enterprises -- in large part because of price.

It has taken years, but Google seems to be cutting into Microsoft's stronghold: businesses.

Google's software for businesses, Google Apps, consists of applications for document writing, collaboration, and text and video communications -- all cloud-based, so that none of the software is stored on an office worker's computer. Google has been promoting the idea for more than six years, and it seemed that it was going to appeal mostly to small businesses and technology start-ups.

But the notion is catching on with larger enterprises. In the last year, Google has scored an impressive string of victories at organizations including the Swiss drug maker Hoffmann-La Roche, where more than 80,000 employees use the package, and the U.S. Department of the Interior, where 90,000 use it.

One big reason is price. Google charges $50 a year for each person using its product, a price that has not changed since the software made its commercial debut, even though Google has added features. In 2012, for example, Google added the ability to work on a computer not connected to the Internet, as well as security and data management tools that comply with more stringent European standards. That made it much easier to sell the product to multinational enterprises and companies in Europe.

Many companies that sell software over the cloud add features without raising prices, but also break from traditional industry practice by rarely offering discounts from the list price.

Microsoft's Office suite of software, which does not include e- mail, is installed on a desktop PC or laptop. In 2013, the list price for businesses will be $400 per computer, but many companies pay half that after negotiating volume deals.

At the same time, Microsoft has built its business on raising prices for extra features and services. The 2013 version of Office, for example, costs as much as $50 more than its predecessor.

"Google is getting traction" on Microsoft, said Melissa Webster, a program vice president with IDC, a market research company. "Its 'good enough' product has become pretty good. It looks like 2013 is going to be the year for content and collaboration in the cloud."

Microsoft has also jumped on the office-in-the-cloud trend. In June 2011, it released Office 365, and it now offers its software in both a cloud version and a hybrid version that uses cloud computing and conventional servers. Office 365 starts at a list price of $72 a year, per person, and can cost as much as $240 a person annually, in versions that offer many more features and software development capabilities. Microsoft says it offers more than Google for the money, but the product has not won many converts from Google.

In a recent report, Gartner, an information technology research company, called Google "the only strong competitor" to Microsoft in cloud-based business productivity software, though it warned that "enterprise concerns may not be of paramount importance to the search giant."

Google is tight-lipped about how many people use Google Apps, saying only that more than five million businesses were using it as of June, up from four million in late 2011. Almost all of those companies are tiny, but in early December, Google announced that even companies with fewer than 10 employees, which used to get Google Apps free, would have to pay.

Google's revenue from Apps, according to a former executive who asked not to be identified in order to maintain good relations with Google, amounted to perhaps $1 billion of the $37.9 billion Google earned in 2011.

Shaw Industries, a carpet maker in Dalton, Georgia, with about 30,000 employees, switched to Google Apps this year for communication tools like e-mail and videoconferencing. Jim Nielsen, the company's manager of enterprise technology, calculated that using Google instead of similar Microsoft products would cost, over seven years, about one-thirteenth of Microsoft's price.

Shaw is a subsidiary of Berkshire Hathaway, run by the billionaire investor Warren E. Buffett. But the close friendship between Mr. Buffett and Microsoft's founder, Bill Gates, did not sway Mr. Nielsen. "When you add it up, the numbers are pretty compelling," he said.

In addition to the lower price, Google has simplicity in pricing. Mr. Nielsen said he had had to sort through 11 pricing models to figure out what he would have paid Microsoft.

But his prime motive in choosing Google, he said, was online collaboration. "As people in their daily lives become more electronically social, they want to bring that into the office," Mr. Nielsen said. "Video is more appealing than a written letter."

Google, he said, is "constantly making it better for teams to work, inside and outside the company, with controlled access."

Microsoft says it does not yet see a threat. Google "has not yet shown they are truly serious," said Julia White, a general manager in Microsoft's business division. "From the outside, they are an advertising company." In 2011, 96 percent of Google's revenue came from advertising.

Even though Microsoft sells a similar product, she said most companies did not want to depend exclusively on the cloud for documents and communication. Microsoft now has some of its own workers entirely online, she said, while others use both local computers and the cloud, to get a feel for how various companies work.

Although she would not provide numbers, Ms. White said Office 365 was "on track to be our fastest-growing business." She said that Google, to be a threat, would need to "provide a quality enterprise experience" in areas like privacy, data handling and security.

But according to the U.S. General Services Administration, of 42 U.S. government contracts for which Google and Microsoft competed in 2012, Google won 23 deals and Microsoft 10. The rest went to another company, Zimbra, which is owned by VMware, a maker of cloud software.

Microsoft's biggest and most profitable sector, its business division, brought in nearly $24 billion in the year that ended in June. Almost none of that came from Office 365, but from the familiar older-style software that resides on computers within the corporation.

As the two behemoths slug it out in the enterprise market, their cloud-computing software is changing the way businesses operate. Internet-based computing makes it easier to communicate both within and outside a company. Software can be fixed and features added automatically, in the same way consumers get the latest version of Facebook when they go to its site.

"People were looking for cheap e-mail at first, but now it's about collaboration, calendaring and data storage online," said Ms. Webster of IDC. Over time, her firm says, at least 50 percent of software revenue will be from the cloud, which could challenge the complex way Microsoft prices and discounts its products.

Ms. White, the Microsoft manager, said Google had "helped amplify a lot of the conversation around cloud productivity." That is a far cry from last February, when Microsoft put a video on YouTube, which is owned by Google, lampooning Google with a parody of the television show "Moonlighting."

Google, the video suggested, would automatically change a buyer's software. But cloud-based software is supposed to issue automatic updates and feature changes. Microsoft has issued several updates to Office 365, although unlike Google, it lets customers delay the changes for as long as a year.


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