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Is Google Eating Microsoft's Cash Cow?

I'm guessing some of you remember those crazy dot-com era predictions that the spread of web-based applications would threaten Microsoft's (Nasdaq: MSFT  ) Windows and Office monopolies. Things didn't quite work out that way, and during the last decade, Bill Gates and Steve Ballmer laughed at those predictions all the way to the bank.

But for Office, at least, Judgment Day might finally be on the horizon, courtesy of Google Apps and its constantly expanding feature set. Worst of all for Microsoft, there's no simple way to respond to the threat.

Is tech history repeating?
In some ways, Google's (Nasdaq: GOOG  ) challenge to Office's control of the productivity software market has a lot of historical parallels. It's another variation of what business guru Clayton Christensen termed "The Innovator's Dilemma," in which the market position of an established technology is "disrupted" by a newer, cheaper technology that gradually offers more and more of the key features the older one provided.

The disruption of the UNIX server market, dominated by proprietary hardware from IBM (NYSE: IBM  ) , Hewlett-Packard (NYSE: HPQ  ) , and Sun Microsystems, by cheaper servers using either Windows or Linux, and running on Intel (Nasdaq: INTC  ) and AMD (NYSE: AMD  ) processors, is a good example of this phenomenon. The first Windows servers to hit the scene in the mid-'90s generally couldn't match UNIX systems in terms of raw horsepower, and they also tended to lack some of the security and high-reliability features that UNIX users took for granted. But they could provide access to applications and information at a much price tag, and often were also easier to install. And as Windows and Linux servers steadily addressed their shortcomings relative to UNIX hardware, they wound up eclipsing them in terms of popularity.

It's easy to see how Google Apps fits into this storyline. Offered for free to consumers, and for only $50/year per user to enterprise customers looking for uptime guarantees and 24/7 customer service for both the productivity apps and Gmail, Google's pricing drastically undercuts Microsoft Office. Office 2010, due out next month, costs at least $119 for a "Home and Student" version that features Microsoft's Word, Excel, PowerPoint, and OneNote apps, and at least $349 for a Professional version that also includes the company's Outlook, Access, and Publisher apps.

Moreover, Google Apps can be accessed from any computer, along with any files that a user's working on. In contrast, a copy of Office 2010 can be installed on three systems at most, and like all PC-based software, it's prone to getting your files stuck on a hard drive far from where you need them. As devices ranging from Apple's (Nasdaq: AAPL  ) iPad to Acer's low-cost netbooks boost the number of devices on which a consumer accesses documents, Google's ability to guarantee their availability on almost any device with an Internet connection can be pretty useful.

Getting good enough
Like many other disruptive technologies before it, critics of Google Apps are quick to point out the many features that it still lacks relative to Office. Most "power users" of Word or (especially) Excel will still find Google's word processing app (Google Docs) and spreadsheet app (Google Spreadsheets) inadequate. But then again, there are still many companies out there installing UNIX servers for critical business apps who will tell you that Windows and Linux just aren't good enough for their needs.

It matters most whether the cheaper technology becomes good enough to meet the needs of most mainstream users. And based on its latest release, unveiled earlier this month, Google Apps is arguably there. Google Spreadsheets has filled some major holes in its feature set; Google Docs can now properly format complex Office documents; and most importantly, multiple users can collaborate on editing documents virtually in real-time.

That last feature is a big one. Collaboration tools are probably the biggest reason why Google Apps is now used (according to Google) by more than 2 million businesses, and why companies like Motorola and Genentech have seen their employees widely adopt it to complement Office, even though they weren't required to. Or why the city of Los Angeles plans to migrate 17,000 employees to Google Apps. What's more, Microsoft and others will be hard-pressed to replicate the complex technology developed by Google to quickly send out the changes one user makes to a document to all of the other people collaborating on it.

Microsoft's big problem
Of course, before Microsoft can try to match Google's technology, it has to be interested in doing so. While Microsoft plans to offer free, web-based versions of its Office apps with the release of Office 2010 this summer, users will need the paid version of Office to get collaboration tools, among many other features. Like many other companies previously caught in The Innovator's Dilemma, Microsoft might theoretically be able to offer a product that's competitive with its Google challenger, but it fears that doing so might cannibalizeits existing revenue streams. Thus, the market-share losses continue.

As the company's 2009 results show, Office might be the most critical part of Microsoft's empire. Microsoft's Business Division, which is dominated by Office sales, accounted for 32% of the company's 2009 revenue, and (more importantly) a whopping 60% of its operating income. And this was more than two years removed from the release of Office 2007, the last major update to the software suite.

With numbers like those, Google only has to take a modest chunk of Office's market share to do real harm to Microsoft's bottom line. And with each new release, it looks more and more like Google is up to the task.

Fool contributor Eric Jhonsa has no position in any of the companies mentioned. Intel and Microsoft are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers recommendation. Apple is a Motley Fool Stock Advisor selection. The Fool has created a covered strangle position on Intel. Motley Fool Options has recommended a buy calls position on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (4)

Comments from our Foolish Readers

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 April 28, 2010, at 12:13 PM, kariku wrote:

    GOOG has been the dog this year, so far.

  • Report this Comment On April 28, 2010, at 12:38 PM, keyers wrote:

    I am not sure. Are you enjoying saying this or what? That's not my point. My point is,

    Any prediction need to check with reality. We are talking about enterprise market right?

    Two years ago, you may also say, Linux will eat Windows market, or netbook is microsoft's big problem. I don't think anybody talking about it anymore. Two years ago, you might also say, microsoft is in danger of missing out the cloud computing, are we still talking about it. Two years ago, a lot of people like you said, Windows is crashing. Would you say that again? Yes, mobile, I honestly tell, I don't think microsoft has any problem in mobile at all. The stupid iphone have been advertised free by people like all over the web. You may think it has to take the world over night. It still just 25% market in the US? and it's not going anywhere.

    Two years ago, you may also say, google stock will hit $2000 by this moment. And you know now it is not going anywhere.

    A little fact checking, search makes up 98% of google's income. What that mean if Bing + Yahoo increase market 5% every year after merging? Is that a good picture for google?

    I don't have problem with facts, I have problem with your attitude. Make prediction like that is more like your wish than reasoning.

  • Report this Comment On April 28, 2010, at 2:53 PM, Pygmalion1 wrote:

    Please read the comments section of this article; from employees of a company that switched to Google:

  • Report this Comment On April 28, 2010, at 3:31 PM, plange01 wrote:

    in reality google is nothing more than a online phone book...

  • Report this Comment On April 28, 2010, at 3:53 PM, only1ferret wrote:

    Tried it. The conversion from word to google wasn't too bad, but there were noticeable differences. When I tried to download (without modify) got this.

    So, I think there is some work to do. Also, I tried it in chrome and I didn't even get this far. I'd call google support on my nexus one, but that doesn't work either :).

    The bad news is that Google Docs has just encountered an error.

    The good news is that you've helped us find a bug, which we are now looking into.

    We apologize for any inconvenience this has caused you.

    In the meantime, if you'd like updates on this and other issues, try visiting our Google Docs Help Group:

    Sorry, and thanks for your help!

    - The Google Docs Team

  • Report this Comment On April 28, 2010, at 4:17 PM, jasonsamuelsmpls wrote:

    Odd that this comes out just as Microsoft is releasing Office 2010. I'm an early adopter and say from experience that it's a stable release and the new features are pretty great. There is no comparison between what a desktop client can do vs. a web based app - and MS Office is simply the gold standard for productivity software. The new version only extends their wide lead.

    That said, Microsoft has taken big steps in this release to compete with Google Apps. They are now offering a free browser-based version, as well as private browser-based versions that an enterprise can host on it's SharePoint Server. The latter feature, along with many other new integration points with SharePoint show that Microsoft's direction is to provide the tools for basically a private cloud service - your end users can get to it from anywhere but the data lives on your own secure servers. This directly caters to Microsoft's core market - the large enterprise. Google has a very long way to go to catch up in that regard. (Though its also true that Microsoft has a ways to go to catch Google for their browser-based product in the consumer market - case in point, co-authoring is not available in it.)

  • Report this Comment On April 28, 2010, at 6:42 PM, TheDumbMoney wrote:

    I have to echo some of the other commenters. I'm a big fan of Google, though I don't own the stock currently. But Google's main (really its only) cash cow is search. And the only thing that keeps most people using Google search is habit. It's not really any better than Bing. There are far fewer barriers to switching than there are with either Windows or Office. So Google is AT LEAST as vulnerable as Microsoft is, and I would personally say, more so.

    I view the story more like this: Google has one enormous cash cow that it knows won't last forever as the by-far dominant search platform. So it is desperately spending (losing) lots of its current cash flow to develop all kinds of free goodies that it prays it can eventually monetize, in order to diversify its revenue stream before the Inevitable happens in the search market. Google Apps is one of Google's primary weapons in that attack. But the article leaves something out: maybe not today, maybe not tomorrow, but soon, and for the rest of its life, Google needs to learn to make money on Google Apps. The wild pursuit of increased market share is fine and dandy, and will hurt Microsoft, but the GM/Toyota approach to Market Share is God is not sustainable forever unless it is actually profitable. That means prices will rise. Google in Apps (and just about everything else) is essentially like Microsoft in X-Box, at least until recently: subsidized the a separate revenue-generating segment of the company.

    I am only going based on what I remember from news articles, haven't thoroughly researched Google within the last year or two, so if I'm wrong about the Apps profitability, I'd be glad to hear it. Still, I have a hard time believing it's racking in the billions, or even the multi-millions. As to the fundamental premise that Google is going to ding MSFT a bit, I totally agree, but Google is just as likely to get dinged on search revenue.

  • Report this Comment On May 02, 2010, at 11:06 AM, RPhipps wrote:

    Seems like just another MF article pumping up Google using one heck of a lot of assumptions while debasing Microsoft. Just remember there are millions of users out there who will stay with MSFT just because they're familiar with the product. Oh, and by the way, Bing is a far better search engine then Google in my opinion so why don't you do an article about how Bing is cutting into Google's cash cow?

  • Report this Comment On December 06, 2011, at 1:23 PM, dionni wrote:

    When I first started computer, it was google who guided me everything what I wanted to know. And it is most people used

    together with Microsoft, lots of people are patronizing obviously this two because they are most likely familiar with the product. In terms of images, I guess Bing for me is one of the best, I think Bing also is sharing a piece of a cake with Google's cash cow.

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