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Microsoft Office Versus Google Apps

Microsoft has problems getting its stock price up where it thinks it belongs. Some analysts believe that the reason, in part, is that Google has introduced free substitutes for the Microsoft Office products. These substitutes are called Google Apps and include spreadsheet and word processing applications. The fear is that Google’s advertising-supported free applications will force Microsoft to reduce prices on Office products where it enjoys a 70% gross margin. These fears are premature and probably overblown.

Google Apps is a long way from offering a true challenge to the Microsoft Office programs. They do now, and probably will for the long-term future, appeal only to small customers. By small customers, we mean customers who buy in very small quantities and account for less than 10% of the total market (see Basic Strategy Guide Step 2). The big buyers are likely to stay with Microsoft for a long time. If history is any guide, Microsoft will have to suffer reliability problems with its Office programs, failing its customers, before a low-end competitor is likely to gain much market share (see Basic Strategy Guide Step 7).

When, and if, it must respond, Microsoft has a number of options (see “Turmoil Below: Confronting Low End Competition” in the StrategyStreet/Tools/Perspectives section. One option is to duplicate exactly the Google business model. Microsoft would introduce a product with the same features as the Google Apps product. It would offer the product for free and rely on advertising to pay for the product. Given Microsoft’s much longer experience with Office-type products, their features and reliability are likely to be easily as good as, and more likely much better than, Google Apps. If “free” is what the customer wants, and in return the customer is willing to put up with advertising and somewhat stripped features, reliability and convenience, Microsoft should be able to match Google with little problem. This would effectively end the Google challenge to Microsoft.

Will this hurt Microsoft’s margins? It is unlikely, providing Microsoft does this soon. Microsoft could design a product specifically for smaller customers and use advertising to support it. These are customers that are not likely to buy the Microsoft Office product anyway. Or at least they wouldn’t buy it for themselves. They may already use Office at work. Microsoft is probably on pretty sure footing, as long as it acts expeditiously.

Posted 5/19/08

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