The Fall of Microsoft Office

On the same day that the state of New York published a report supporting open formats for electronic documents, mighty Microsoft (Nasdaq: MSFT  ) said that it would support the open-source ODF format in Office 2007. Redmond's own Open Office XML specification may be heading for the great Recycle Bin in the sky, never to come back.

What happened?
The twin developments are noteworthy to astute investors for multiple rasons. While several European countries, the EU itself, and the state of Massachusetts have distanced themselves from proprietary document formats like Word's .doc text documents and Excel's .xls spreadsheets, the same scene looks much more dramatic from the lofty heights of the Empire State.

Across the continent, Mr. Softy rarely throws in the towel until he knows that he's been beaten. Just look at the measures the company is willing to take to stay in the online search fight, despite being thoroughly dominated by Google (Nasdaq: GOOG  ) and even Yahoo! (Nasdaq: YHOO  ) . Redmond's hardly fond of wasting its resources, because the company has a pretty good track record in these extra-innings showdowns. But its winning streak only makes its surrender here that much more glaring, especially when the company's backing down on turf it actually created years ago.

Why is this a big deal?
Office apps are big business for Microsoft. The Microsoft business division, where Office sales make up the bulk of the operation, provided $18.3 billion out of the company's $58 billion in sales in the past year. The business division also brought in $11.9 billion out of $20.8 billion in operating profit. If the golden Office goose leaves the building, Mr. Softy will be very sad indeed.

That's why Microsoft has been so keen to keep the inner workings of its file formats secret, so that upstarts like Corel (Nasdaq: CREL  ) WordPerfect or IBM's (NYSE: IBM  ) Lotus Office would never get the details quite right. It seems that the open-source ODF format, first spawned by Sun Microsystems (Nasdaq: JAVA  ) and popularized by the free OpenOffice.org office suite, has finally broken the camel's back.

To be sure, various legal challenges to the Microsoft monopoly also helped, and perhaps some other third-party specification would have received this newfound support if ODF wasn't there. The antitrust departments domestically and abroad might have played a large part in forcing Microsoft's hand here. In the end, this can't be good for Microsoft's ego -- or its business.

It's a new world, baby
Most of the Office alternatives that support ODF files today have a serious price advantage over Microsoft's products (you can't beat free). And while their support for true-blue Microft-generated files is good, it's not perfect. In that light, you can understand why there must have been a lot of hair-pulling and tooth-gnashing -- maybe even some chair-throwing -- in Redmond before Microsoft made this difficult decision.

When creating business documents in Google Docs, ZoHo, or OpenOffice and sharing them with users of vanilla MS Office becomes both simple and a guaranteed success, there will be much less reason for users to cling to proprietary, locked-in formats. After that, users and IT managers can choose alternative office suites without alienating the regular Office users of the world, and Microsoft will have to protect its cash cow through excellent support, great design, and useful new features, rather than just guarding the well-worn standard upgrade path.

I can't say that Google or Sun or anybody else just won a bigger share of the office software market, and if they did, it won't help their revenue or profits directly anyway. But it's clear as day that Microsoft just took a serious hit, and the impact may take a long time to make itself felt but it will come.

The company's biggest revenue generator may be a shadow of its former self in a few years. I just hope that Microsoft has some alternative business prospects on tap -- and no, tackling Google's search hulk head-on doesn't count.

Further Foolishness:

Microsoft is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund is a Google shareholder, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like. This Foolish disclosure notice was written on a slightly buggy version of OpenOffice.org.


Read/Post Comments (3) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 27, 2008, at 9:00 PM, StevenDutch wrote:

    The guy who installed my roof came by the other day. He wanted to be paid every time it rained because I got utility out of his roofing job each time.

    Any workman who really tried something like that would be laughed out of town. You do a job, get paid, and if you want more money you do another job. Only in the demented world of IT do you do a job once and get paid for it forever.

    Bill Gates made $100B performing a real service. But he needs to face reality, take the money, and do something else with it. There may be improved functionality at deeper levels, but as far as I'm concerned, Windows XP is not much better than Windows 98. (Vista is down somewhere around DOS 2.0). All the endless updates have done is tweak the basic design and add cruft.

    The basic operating systems and productivity programs have all been written. When someone comes along with a real innovation, let him market it. But the endless churning is starting to be seen for the scam it is. The ore's playing out.

  • Report this Comment On May 29, 2008, at 8:42 PM, badrulnazar wrote:

    We have heard "The Fall of Microsoft Office" and "The Fall of Windows" since the beginning of time.

    Yet none of them materialize.

    If they keep on inventing and creating things that is useful to average Joe in the officespace, none of the prediction above will come true.

    Average Joe does not want to know the underlying technologies of the software.

    They just need the technology to work for them.

    When they buy a TV, they want to watch TV programs.

    They dont want to waste time opening the TV box and change the components inside to suit their peculiar needs. Only geek does that.

  • Report this Comment On April 09, 2011, at 5:45 AM, abubakerjalil wrote:

    i like your post it is very nice i found alot of information thanks and keep it up <a href="http://www.tajweedseeker.blogspot.com"> tajweed</a>

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