Is Microsoft Killing Its Cash Cow?

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There is little doubt that PCs are being cannibalized by tablet and smartphone sales. However, it is also true that to get any real work done, most businesses need at least a decent word-processing program, and many can't live without a spreadsheet program as well. Microsoft (NASDAQ: MSFT  ) Office has become the dominant offering for productivity software, but the company may be slowly bleeding its cash cow dry.

The contenders
Many businesses are still choosing Microsoft Office, and the company carries a commercial gross margin of better than 80% because of the sales of this highly profitable software. In addition, Microsoft generated almost $7 billion in free cash flow in just the most recent quarter alone. A large portion of this free cash flow comes from the company's sale of Microsoft Office to both consumers and businesses. Apple (NASDAQ: AAPL  ) recently tried to rock Microsoft's boat by bundling for free its Pages software with any new Mac, iPad, or iPhone purchase.

For those who prefer the use of cloud-based solutions, Google (NASDAQ: GOOGL  ) Docs is a compelling solution. If you want to avoid using any of these options, there are also options like OpenOffice. The bottom line is Microsoft is not the only game in town, and each option offers its benefits and drawbacks. The question is, what can investors learn from what each company offers?

The Apple gamble
Apple's tight integration of Pages, Numbers, and Keynote with iCloud is a stroke of genius. In theory, as customers put more documents in iCloud, combined with their pictures, videos, and apps from their iPad and iPhones, they might need to purchase additional storage. This could lead to additional revenue and higher retention rates for the company's already loyal user base.

The idea that a customer can start a document on their Mac, update it on their iPad, and finish it on their iPhone sounds great on paper. However, Apple is missing some key features. First, the lack of file management is a key issue, as today you can only really see all of your iCloud items on the iCloud web site.

In addition, customers can only store documents, spreadsheets, and presentations in iCloud. The lack of a full-featured cloud storage option is a big missing piece if customers everywhere are going to use Apple's storage exclusively. In addition, Apple's web based versions of these apps are woefully weak and missing key features. In addition, a shared Pages document doesn't work well with mobile apps like Office2, Kingsoft Office, or others unless it is exported as a Word document first.

That being said, if a customer doesn't need to share their documents and just needs simple word processing or spreadsheets, do they really need Microsoft Office? Apple's gamble may pay off, but some of these issues are indicative of a company that spends just 3% of revenue on R&D.

The cash cow killer?
While Apple's gamble may take an incremental amount of sales from Microsoft Office, Google Docs has the potential to take down the whole ship. There are several big differences between Google Docs and Apple or even Microsoft's programs.

First, Google Docs saves everything automatically. While Microsoft Office documents can be saved to Skydrive, and Pages or Numbers can be saved to iCloud, it is still a process of typing Ctrl + S or Command + S as the case may be. If you work on a document, forget to save, and the program crashes, you still lose data. With Google Docs, the system constantly saves updates as you type or create.

Second, Google Drive can save everything and works well with PC, Mac, and devices. Just download the Google Drive program on your PC or Mac and tell it what to save to the cloud. While Skydrive does this too, without a Microsoft Office subscription of $99 a year, you get about half the storage space (7GB with Skydrive versus 15 GB with Google Drive).

Third, and maybe most important, Google Docs is free. The common user can create a document, share it, download it as a Word file, and it costs exactly nothing. To do this same thing with Microsoft Office costs about $140 for a single-user license, or $99 a year.

If Google can convince users to buy into Google Docs, it's not hard to imagine more usage of Gmail, Google+, and other services. The bigger the tie into Google's offerings, the more opportunity to sell ads for the search king.

Final thoughts
Microsoft's Office 365 subscription service of $99 a year gives you 5 licenses for computers and 5 licenses for mobile phones. The question many users may begin to ask is, do I want to pay $99 every single year if I just need to create documents or spreadsheets? The better question is, if I own two computers do I want to pay $280 (two $140 licenses) so I don't have to pay $99 a year?

Though the economy is improving and customers want to use what they are comfortable with, the idea of paying hundreds of dollars to use Microsoft Office might be asking too much. With Apple and Google offering real alternatives to users, Microsoft's own pricing might bleed its cash cow dry.

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Read/Post Comments (11) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On January 15, 2014, at 7:38 PM, prestate wrote:

    Apple Numbers and Pages like Google Docs saves everything automatically. The statement that to save Apple documents in Pages or spreadsheets in Numbers, you have to click Control + S or Command + S is incorrect.

  • Report this Comment On January 15, 2014, at 8:15 PM, revben wrote:

    Really? You cannot be that bias, I am sure you know that Office Web Apps are totally free and save automatically and has online collaboration.

  • Report this Comment On January 15, 2014, at 8:24 PM, RMorgenier wrote:

    As someone who used Office for a long time, tried Google Docs and iWork, I have to say that iWork fits my workflow very well. I got tired of having to pay for each new version of Office just so I would be sure to be able to open clients docs. If you need advanced Excel however, there is no replacement yet. Simple spreadsheets may be accomplished with other apps, but Excel rules here.

    One of the things that this article gets wrong is the statement about iWork (Numbers, Pages and Keynote) files needing to be manually saved is WRONG. They are saved automatically as you work. This has saved me a few times. Creating iWork docs on my iMac and then being able to access them from my iPad while on vacation without having to think about where the files are or signing into a web site is a real time saver. A few quick changes and they're off to the client!

    I'm a bit jaded against Google services. I don't like the way they collect all of my information. Once I was using Google docs and mentioned Walt Disney in a file, next thing I know, I'm getting Disney World ads in my Chrome browsing! Not too comforting.

    Just my 5 cents.

  • Report this Comment On January 15, 2014, at 8:31 PM, RMorgenier wrote:

    @revben- you're right, it seems that this author only wanted to promote Google docs with this article.

    I'm so tired of these blog type pieces that don't actually have any investigation, only a predetermined outcome.

  • Report this Comment On January 15, 2014, at 9:07 PM, helmutshea wrote:

    "Pages or Numbers can be saved to iCloud, it is still a process of typing Ctrl + S or Command + S as the case may be. If you work on a document, forget to save, and the program crashes, you still lose data. "

    This is completely untrue. Pages and Numbers save your work automatically.

    "... as today you can only really see all of your iCloud items on the iCloud web site."

    This is also untrue, since all Pages and Numbers documents stored in iCloud can be seen in any device. File > Open on a Mac, by tapping Documents on an iPad, or on any device through the iCloud web page.

    These egregious errors call into question the veracity of this entire story.

  • Report this Comment On January 15, 2014, at 9:16 PM, Bert31 wrote:

    I get 25 gb storage free on Skydrive as does anyone who grandfathered in before they changed it to 7 gb. I also took advantage of the home user program and got the entire office pro suite for $9.99. I can use this on any device by logging in through skydrive, not just my pc I downloaded the software on. The office subscription is unnecessary. How much does Google make off docs?

  • Report this Comment On January 16, 2014, at 1:34 PM, CrazyDocAl wrote:

    Most companies don't want documents stored on the "cloud". They either need to be on your personal computer or the company server as they are the two places that the company can control, both security and for backup purposes.

    Google documents are great for schools and dealing with customers/ suppliers for things like quotes but not for internal documents. Apple doesn't play well with others so they are pretty much excluded from most businesses.

    As far a tablet goes, it's fine for occasional data entry or a a note or two but it isn't a direct replacement for a laptop. Windows is still king and will be for a decade or more. Companies are realizing that they do not need to replace computers as often.

  • Report this Comment On January 16, 2014, at 6:53 PM, dalumpai1 wrote:

    The real power of MS Office is in Outlook and it's Exchange servers. No product out there can replace Outlook's calendaring and scheduling. Place your Exchange servers on clustered virtual servers with Replay's virtual standby, you have replication, backup, and fail over. That's it...

  • Report this Comment On January 16, 2014, at 9:14 PM, RMacky wrote:

    Everyone has their favorites. I use Apple hardware exclusively, but do prefer MS Office for spreadsheets and word processing. However, I have heard that the latest version of Office has a new and more difficult UI.

    I'm surprised that wasn't part of this article. Apparently the "Ribbon" UI is pretty widely hated. Changes like that will kill Office faster then anything.

    If I had to relearn Office, I'd be thinking about learning something else. It's not an easy product to learn in depth and took some time to use most of the features in the first place.

  • Report this Comment On January 16, 2014, at 9:35 PM, ComputerExpert wrote:

    Don't even get me started on MS Office. I've been using office for DECADES and Microsoft (MS) screwed the pooch, when it abandoned the common user interface standards (CUIS) with Office 2007 for "a new look," that required a heck of a lot of adaptation.

    MS got a lot of complaints and when MS released Office 2010 and Office 360, and they still haven't corrected the problem regarding CUIS and listening to their clients.

    People are still running Office 2003, including your's truly. I fail to see how a new version of MS Office is going to have a positive impact, especially when the leaning curve is too painful.

  • Report this Comment On January 17, 2014, at 5:31 PM, gkirkmf wrote:

    I have upgraded to office 2013, and there are a lot of new features and polished older ones. Yes, there is a learning curve, but I find it worth it. And, no one has mentioned Access.. No one has a database product comparable to it, not even Oracle. I use it in combination with Excel for most of my home projects, and many of my small business customers.

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Chad Henage

Chad is a self professed tech nerd and has been investing for over 20 years. He follows nearly everything in the technology and consumer goods sectors, and is a huge fan of the Peter Lynch investing style. He has over 1,000 published articles about stocks and investing. You can follow Chad on Twitter at @chadscards1274.

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