Microsoft Office 2010: A Necessary Slap At Google

Microsoft this week pulled the curtain off of Microsoft Office 2010, the next release of its ubiquitous desktop productivity application suite, which will also contain a free option in Office Web, a cloud-based version that will go head-to-head against Microsoft chief rival Google.

Microsoft plans to release Office Web, the cloud-based component of Office 2010, which will spark a battle in the cloud with Google's Docs offering.

The full Office 2010 suite will hit the streets in the first half of next year. When Office Web goes live, it will offer stripped-down versions of Word, Excel, PowerPoint and OneNote in the cloud. Users will be able to access the applications directly through Microsoft's Windows Live portal, and they will launch directly within a browser.

Microsoft's unveiling of the free Office Web applications comes as Google and its free Web-based Google Docs offering continues to woo away once-paying Microsoft Office users. Industry analysts said Microsoft's free Office Web offering is a chance for the software giant to regain some of the users it lost to Google while also re-establishing its dominance in the productivity software space.

"It's a very competitive market out there, and this was Microsoft's opportunity to one-up Google by offering a much better product," Forrester Research analyst Sheri McLeish told the Los Angeles Times.

McLeish noted, however, that Google had Microsoft painted into a corner, and the only way it could respond to Google Apps and Google Docs was to offer a free application suite of its own.

"Microsoft was forced to provide a free product," she said.

Another analyst, Sandeep Aggerwal with Collins Stewart, agreed. He told the Dow Jones Newswire that Microsoft gets about $4 billion in revenue from consumer Office users, customers that will most likely jump at free Web-based versions of the software.

"Google's initiative is forcing Microsoft to change its business model," he said.

And while Microsoft is taking aim at Google and reclaiming its turf, Microsoft offering free Web-based applications has some industry watchers wondering how Microsoft will make money with free software via Office Web. It's the age-old question of why buy the cow when the milk is free.

During the first three quarters of fiscal 2009, Microsoft's software division, which includes Office products, made $9.3 billion in profit from $14.3 billion in sales, with Office representing the majority of those sales. How does Microsoft plan to continue that domination when it is giving away a product that generates massive revenue?

IDC analyst Melissa Webster told The L.A. Times that so far, free Web-based document editing software hasn't eaten away at Microsoft Office's market share, and a recent study found that nearly every user of Web-based software also used Microsoft Office.

"Web-based tools are not taking share away from Microsoft's desktop Office suite," Webster told The L.A. Times. "But to the extent that these products are complementary, Microsoft needs to get in the game. They risk losing users as people get more comfortable using Web-based tools. And they risk losing their edge."

Microsoft has said that the free version of Office 2010 via Office Web won't give users all of the same features and functions they would receive if they purchased the desktop-based software, which will run from about $70 to $350 depending on the version. For example, Microsoft said Office 2010 will feature video editing in PowerPoint and image manipulation in Word, two features that the free version will not offer.

Piper Jaffray analyst Gene Munster told Dow Jones that Microsoft's departure from selling software to offering free Web-based applications was a necessary defensive step as the company looks to outshine its rivals.

"Making sure people are still using Microsoft products is more important" than risking revenue in the short term, Munster said. "They need to keep people using Office."

And Broadpoint AmTech analyst Ben Schachter told Dow Jones that launching a free version of Office requires Microsoft to create a balancing act between its free software and its enhanced services, like Google does.

"The key for Microsoft will be: Can they sell more enhanced services?" he asked. "It's a fine line."