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Do you remember when Microsoft (Nasdaq: MSFT ) didn't have any competition? It's hard to believe such a time existed. Those were the good old days for Mr. Softy, but they're gone now -- and the company's feeling the heat from all sides.
Whether its mobile operating systems or search, Microsoft has found itself competing against and trailing Apple (Nasdaq: AAPL ) and Google (Nasdaq: GOOG ) . On the high end of consumer PCs, Apple has taken share from Windows operating systems, and on the lower end, consumer netbooks from Hewlett-Packard (NYSE: HPQ ) and other PC manufacturers have Linux-based operating systems as an option. While these challenges may be a blow to Redmond's pride, they have yet to be a threat to its business. However, with Google Apps, Microsoft is seeing a major challenge to one of its most important products: Microsoft Office.
Microsoft Office represents nearly 30% of Microsoft's revenue, and at least 50% of total operating profits. Any attack upon it hits the company where it really hurts -- the bottom line. On its website, Google states that more than 2 million businesses are using Google Apps. At $50 per user per year, Google Apps is pitched as a way for businesses to save money: an important product feature anytime, but even moreso with today's weak economy.
The newest version of Microsoft Office, which incorporates collaboration and Web-accessibility features, is in beta, with wide availability scheduled for June. As it pitches its Office Suite to business customers, Microsoft must now factor in Google Apps' rivalry. Whether they are willing to make the switch to Google Apps or not, large businesses may use it as a threat in negotiating enterprise license pricing for Microsoft Office. For smaller businesses, Google Apps may well be good enough in light of the cost savings, and there's no doubt that Google will continue to work on closing the gap between its product and Office.
Currently, Google Apps does not generate a meaningful amount of revenue relative to the company's other businesses. But Google Apps revenue is not necessarily a good way to measure the degree of disruption it may eventually have on Microsoft's hugely profitable Office franchise. Just look at Microsoft offering free online versions of its next Office, and the pricing pressures it may now endure, to see the outsize effects Google's Apps will have in years to come. It is entirely possible for small, innocuous-looking businesses to disrupt much larger ones … just ask the newspaper industry.
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Fool contributor April Taylor owns shares of Apple and Google. Microsoft is a Motley Fool Inside Value selection. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.